Balancing your Portfolio

Balancing your share portfolio


Let's assume that you've started to get your personal finances under control. You're aware of your income and outgoings and have ensure that your income is bigger. You've started saving 10% - 15% of your net income each month and begun investing in a pension. You've even begun researching and investing in stocks and shares or index funds. However there is one thing that you're still unsure of: What mix of investments and cash should you hold in your personal wealth portfolio?

Balancing your Personal Portfolio 


There are several schools of thought on how to balance your personal wealth portfolio. For ease of understanding and simplification we will make several assumptions. We will ignore property. Whilst property should be a part of your portfolio property is unreachable for many of us until we have build up a decent amount of wealth first. We will assume that cash and bonds are the same. Likewise, we shall group all investments, regardless of risk profile together. You should have a decent mix of products in both categories, the proportions of which are a discussion for another time.

Share portfolio: The Age Method


This method suggests that you should take 100 and minus your age from that number. That figure is the percentage of your personal portfolio that should be in investments, with the remainder in cash and bonds. The theory is that as your get older you're less likely to want to take risks with your finances particularly as you may have dependants who rely on you or you may rely on your wealth as an income as you get older.

There are a couple of reasons why I don't like this method. It automatically forces a younger person to take on more risk (by having relatively more investments) and an older person less risk. This completely ignores the overall financial situation of the individual. There could be a scenario whereby a young person has large commitments in terms of family and cannot afford to take risks with his finances. Alternatively an older person may not need the money in their old age as they have a large pension, a high paying job or property income. Instead they may wish to try to pass on a big pot to their relatives through an inheritance. In which case they may wish to have a high proportion of their wealth in shares.

Share portfolio: The Risk Profile Method


This suggests that the split in your investments should be in a ratio that you are emotionally most comfortable with. It suggests that if you have a portion of your money in investments, would you be comfortable with it falling to half it's value? Obviously the answer is no! No one likes losing any money, but the point is, what amount would you feel comfortable risking (and potentially losing most of it) and still being able to sleep at night.

Whilst this option caters more to the individual and their taste for risk, it doesn't actually guide you on how you should split your investments. How do I know whether I'm more comfortable with a 34:66 split as opposed to a 35:65 split between bonds and investments? The answer is that I probably don't know.

Share portfolio: The 50:50 Split Rule


This supposes that whatever you age, wealth, risk profile you should always split your money in such a way that 50% is in bonds and cash and 50% is in investments. The theory is that if your investments do well and the split moves away from 50:50 such that it is 45:55, then the rule forces you to sell some shares and buy bonds until the split is 50:50 again. 

The benefit of this method is that it forced you to sell investments when they've done well, and the market is high, and to buy more when they've done badly (I.e when the market has fallen). This encourages good investing habits.

However, I do feel that although this technique encourages good habits, it is a little annoying for someone who may be more comfortable taking on a lot more risk and vice versa.

Share portfolio the 75:25 Split


This method is an adaptation of the 50:50 rule. The difference here is that you can adapt your split based on your risk tolerance. If you're feeling more bullish (thinking that equities will go up) then you can hold 75% of your wealth in stocks and shares. If you aren't confident in the future of shares you must still hold at least 25% in equities. 

This method allows flexibility based on your risk profile and based on your thoughts about the future. It still encourages good discipline to make sure that you aren't buying and selling at the wrong times (ie selling at the bottom and buying at the top).


Portfolio Preference


Personally, I prefer the discipline of the 50:50 rule. However, I appreciate that different people, with different mind sets may prefer a different method. I wouldn't suggest that one method is better than any other.

Readers, are there any other personal wealth portfolio methods out there?


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Winning a million!

What would you do if you won £1million?


Asking yourself this question is a fun exercise but the thought exercise has a more fundamental importance as it focuses your mind on the long term goals of saving and investing.


Is a million enough?


I think the first thing to say is that £1 million is not a lot of money nowadays. Certainly at my age (nearly 24) I could not  even consider retirement with £1 million in the bank. After all, this blog is about becoming a MULTI-MILLIONAIRE. By definition, one million is not enough. So the first thing to note is that the £1 million winnings would have to be put to good use in terms of wealth creation.

Where is this million coming from?


I think in this thought experiment the £1 million is either coming from the top premium bond win (if you have any premium bonds), or else is a relatively small lottery win (if you play), or it could be from a surprise inheritance. The point is that you received the money without too much effort.

Spending a million quid!


There are several things to consider once you've received the money. You need to think about tax considerations I.e to look for the most tax efficient protection for your money. You also need to try to find a way to earn a decent return. You also need to consider what sort of access you need to the money and also what sort of risk you're willing to take with it. Very importantly you need to be aware that if you're putting your money into a bank then you are not protected for the full amouny under the government's financial protection scheme. Currently, if you have more than £85,000 in an accout with a bank then this will not be covered by the scheme should the bank go bust. You may also wish to earn an income from your investment or spend it. However, I shall detail only what I would do in my current circumstances.

One of the first things I would do is to invest £30,000 into premium bonds, the full allowable amount. Whilst the return is only 1.8% on average, these returns are tax free. I also have the upside of potentially winning large amounts (I could win one million again, ad infinitum!).

I would utilise my full ISA allowance of £11,520. Using a stocks and shares online broken, I would invest half of the money in  blue chip stocks that offer a decent dividend yield of about 3%. I would invest the other half into an All-Share Index Tracker to aid diversification, reduce risk and to smooth out my return.This should provide me with a long term income return that has some protection from inflation. Each year I intend to fully utilise my ISA allowance in this way for the next 20 years at least. If I am married, I have the option to utilise a second amount of £11,520 (ie my wife's ISA allowance - assuming she allows me to do this!).

So what have we done so far? I've put £30,000 into premium bonds and stashed away £200,000 into easy access savings accounts (split between a few banks for security) to earn a little interest before investing it with a stocks and shares ISA trading account. I have also begun utilising my full ISA allowance for the year by investing in stocks and shares.


A millionaire goes househunting


The next step is to buy my first property (THAT I CAN AFFORD OUTRIGHT!). It would be a nice two bed, flat, worth about £400,000 in a decent part of London. Whilst living here I would save up for my next property with the intention to keep the current flat and rent it out to tenants to produce an income stream in the future. So, I've spent £630,000 so far, what else?

The next stage would be to put £200,000 into low risk bonds for as long a period as possible. I clearly do not need the money in the short run but would like a decent level of interest. Typically, the longer you tie up your money the greater the return. The addition of bonds to my portfolio adds some diversification away from property and shares. 

I would set aside the remaining £70,000 into a pot of it's own. This pool of funds would be purely for enjoyment purposes. It would pay for meals out, cinema tickets, gym memberships, theatre tickets, mini-trips away, classes, and days out. The point is that this account is to enable the things that I enjoy in life. This would not pay for anything ridiculously expensive like a world tour! Any summer holidays will still be paid for out of my salary.

I would continue to have a job and complete the accountancy qualification that I'm working towards. I would also still contribute to my pension. This is because I would not want to lose out on the tax benefits and employer contributions, effectively free money. I would like to have a steady and assured stream of income in my retirement. 

Winning £1,000,000 so early in your life does not guarantee a life free of money worries but it sure helps!

Readers, what would you do if you won one million today?

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Science of Wealth

How to Become Rich


As I write more and more articles from this blog, reading and researching around the subject of wealth creation one thing is becoming clear. Many people think that  building wealth is complicated. They believe that the rich have a secret formula or that others are only rich because they inherited money. The more I discover about the subject of building wealth the more I am convinced that those people are wrong. 


Wealth creation


There is no secret to becoming rich. Building wealth comes down to a single and simple formula that I shall reveal. The formula is as follows:

If A - B > 0 is true then you will build wealth. That is, if the difference between A and B is greater than zero then you will build wealth. But what are A and B? 

Some of you will think me stupid and wasting my time writing this post as A is simply your income and B is your outgoings (all expenditure). Many of you are thinking "why are you stating the obvious?" I'm stating the obvious to ensure that when you don't follow this formula and complain that you don't know how to build wealth then you have no excuse.

If you want to build wealth you have to have to have to make sure that the total of all your income is greater than the total of all of your expenditure. To know this you need to track your spending. You need to know exactly how much you are spending and on what. Then you need to compare this with how much you are making each month. If you are earning less than you are spending and want to build your wealth then DO SOMETHING about it! Cut your spending in the areas that are dispensable. If you desperately want to become rich then you need to control your spending. Do you need to go to the pub tonight? Do you need that extra pint? Is it cheaper to eat at home? Is is cheaper to make a packed lunch for work rather than to go out and buy your Pret a Manger sandwiches? Do you need that Starbucks coffee? Couldn't you have take a thermos flask from home? 

I think you get the picture.

Once you've begun to control your spending habits you've solved the 'B' part of the equation. Now onto part 'A'!

Growing your Income


Okay! So you've got your expenses in order (reader, be advised that controlling your spending can take months or recording your expenditure patterns and tons of self discipline. Those readers who are not able to complete this stage of the formula should give up the idea of ever becoming wealthy.) Now you need to boost your income.

I know what you're thinking. You're thinking that you have a job? There's only so much you can do to boost your income. Here are a few ideas. Have you tried going for a promotion? Have you tried asking for a pay rise? (Be advised that the first two suggestions are for those that deserve it.) Have you tried selling anything on eBay or Amazon? Have you thought about setting up a business, especially since starting up a side business is very cheap nowadays (this is something I am currently in the process of doing. More on this in the future)? Are you investing your savings wisely? Could you commit some of your funds to longer term bonds for a higher return? Could you take on more risk as you are not willing to touch your capital in the short term? Can you find blue chip shares with high dividend yields from which to earn an income (and become an ISA Millionaire)?

As you can see, there are many possibilities to consider when looking to make sure that the left side of the equation is greater than zero. 

I will remind you of the key lesson again, just in case you haven't quite understood yet (reader rolls their eyes), to build wealth your total expenses must be less than your total income.


Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Moving houses and your Finances

Moving house? Worried about your house finances? This article is aimed to help ease some of that stress by trying to de-compartmentalise the financial actions that need to be taken when moving property.


A Guide to Finances when Moving Rental Property


It is a well known fact that one of the most stressful things that will probably happen in your life, aside from divorce, is to move house. I am currently going through this process at the moment. This article is aimed for those of us in the rental market but many of the ideas are transferable to the buying market.This article aims to reduce some of that stress by helping you to organise your finances ready for the move.

The Old House Finances


There are a number of financial matters that will needed to be finalised in your old house whist simultaneously sorting the new house finances.

The following is a step by step guide of things that you should think about when moving house:

1. Make sure that once the final payment comes out of your account and is transferred to the account of the letting agent or landlord, call up your bank and cancel the direct debit. You want to try to minimise all risks of having any cash flow problems once you've moved. Cancelling the direct debit should ensure that your landlord it letting agent cannot "accidentally" take an extra payment once you've moved.
2. Call up all bill Companies one month before you leave. You should ask each of them in turn what their policy is on customers looking to close their accounts with them and how much notice you should provide them. Once they have explained the process, write a reminder (set an alarm on your phone!) on the dates that you need to cancel you bills.
3. Do not forget all the Companies that you pay bills to. Write a list of which Company provides your heating, gas, electric, water, Internet, phone line, digital TV, and council tax. For all of these Companies follow step 2.
4. Be aware that some Companies will have Contracts that you cannot just cancel. You may need to buy your way out if the remainder of your contract with these Companies. Unfortunately this is tough luck but we'll know for next time that we must check that we are entering a 12 month contract only!
5. Once you've moved out/ the time has come to give notice to cancel your bills then call up the various companies and make it so! Following this make sure that you cancel the direct debit with your bank just as a precaution.
6. Once all the final payments have been settled and you have recovered any balancing credits owed to you I would advise closing your current account, assuming the account is not your main account. If this is not possible I would recommend monitoring the account for the next couple of months to make sure that there are no unwanted direct debits leaving your bank account.

The New House Finances


The following is a list of procedures that you should take when sorting out the finances and bills for your new house:

1. The best think to do is to set up a separate account well in advance of the move. Typically banks can take 2 weeks to fully set up your account (except for a few newcomers to the market who can have an account set up within half an hour of walking into the branch). To be on the safe side I would allow 3 weeks prior to moving to set up the account. 
2. Fund your account (and get your flat mates, where appropriate,) to the tune of your deposit (normally 6 weeks rent in the UK), the first months rent and any administration fees (that many agents unethically charge). 
3. The next step is to work out how much is going to be required in terms of bills. You can normally find what band of council tax your next property will be in by searching online. Otherwise, you can call the local council to find out. Add on an estimate for Internet based on your soon-to-be supplier's Internet quotes. You can ask the previous tenants what the water, gas and electric bills will be. Alternatively you could go on comparethemarket.com or other price comparison website to get a quote. Pick a quote from the middle of the list, rather than the cheapest. This is more prudent. Don't forget to add on any household items such as cleaning products, toilet roll, or kitchen roll. I usually estimate this to be about £15 per month for a four bedroom house. If you consider this to be too high then remember that it is always better to be prudent. Now add up all the bill costs plus what the rent is and divide that total by the number of flat mates. This is the amount of direct debit that each person should contribute towards the house finances.
4. Make sure that all the flat mates contribute an extra £100 each at the beginning. This should cover any TV licence payments or surprise costs. It should also provide a float to save any risk of going into your overdraft.
5. Once you've moved (after paying the deposit and the first months rent) you can set up all of your direct debits for the bills and rent. I'd encourage you to shop around on price comparison websites to find cheaper deals on your energy, if possible.

It's all about automating as much as possible so that you don't have to worry about making payments at the correct time. Direct debits and standing orders are a wonderful service from the bank. Just make sure that you check them every now and again.

Moving house is a difficult and stressful time. Hopefully this helps ease some of the stress a little. Now you just need to pack up and move! Good luck.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Multi-millionaire Road Plan Review (5)

Blueprints:

This post details my financial progress as of the end of July 2013. All posts of a similar title to this one are written to demonstrate how all prior published articles interlink to form my plan to become a Multimillionaire. Think of these posts as a self-review of my progress and the blueprints to my Multi-Millionaire Road Plan. I encourage my readers to add comments on these posts. Feel free to compare to my previous report:


Multi-Millionaire Road End of July 2013 Report:

As always I'd like to offer a huge thank you to all my readers. Without your readership, comments, tweets and following I would not find the motivation to keep posting. I hope you will continue to find this site interesting. 

In particular, I would like to thank all those readers who have recommended any I their friends to start to follow this blog.

Website Progress

As you may have noticed, I am not hugely tech-savvy and in terms of a technologically impressive website it is definitely lacking. I have always felt that the pull of my site should be its content of which I am working constantly to improve. If any of you have any suggestions to improve the site then please feel free to email me at mrmoneybanks@multimillionaireroad.com. 

Recent statistics show that the site attracts on average between 100-150 readers per day. I am extremely happy with this level of readership but would always welcome more. If anyone invites a friend or family to read an article that i have written, or shares one of my posts I will personally get in touch to say thank you.


Get Rich Plan Update

Picture from freedigitalphotos
I am almost 11 months into working life and I am now still able to save roughly 20% of my monthly net (income after tax and pensions comes out of my pay package) income, which is just over £1,681 per month. This means that i save about £340. £135.75 goes into a Company pension scheme each month andis matched by my employer in full. 

The income set aside for savings is taken directly from my current account into a monthly saver earning a meagre 3.25%. Some of my coworkers (on the same wage) are surprised that I am able to save this much considering almost half my net income goes on rent. I put this down to my budgeting technique and method of automating my savings. I am approaching the 12 month mark on this monthly savings account and will soon transfer part of the sum into an ISA online stocks and shares account to buy more undervalued and dividend paying stocks (assuming there are any!). The remainder will go into my cash ISA account. The reason why I will be splitting my cash is as follows. Following my summer reading of The Intelligent Investor I have learnt that an optimal strategy is to portion your wealth 50% into Stocks and shares and 50% into cash and bonds. I am currently slightly heavier in investments and so will probably need to add additional funds to my cash account before adding to investment portfolio.

My current share portfolio is performing strongly. The FTSE100, for example currently sits at about 6500 points. When last I wrote it was at 5900. Although it is folly and fairly meaningless to make a prediction on the stockmarket I shall do so anyway: It will go up or down or stay the same, but regardless of the movement I will look to improve my research in the hunt for undervalued shares.

If you take a look back at an article back in March 2012, I gave my current financial breakdown. I now wish to update my current asset holdings:
  • £825 - Sits in cash as a deposit for the flat I currently rent. I have written this down by about £150 as it becomes apparent that I will not get it all back
  • £2245.42 - Current Account. This is obviously before any spending has occurred for the month of August.
  • £2522.55 - Monthly Savings Account
  • £571.77 - Everyday Savings Account
  • £7999.79 - Loyalty Reward ISA
  • £100 - UK Premium Bonds
  • £11,889.41 - Online Shares
  • £2,039.73 - Funding Circle Investment
  • Total Accessible Assets: £28,192.94 (April 2013: £25,967.95)
This represents a growth in Total Accessible Assets of £2,224.99 (8.7%)
  • £2,964.89 - Friend's Life Pension (contributions since October 2012)
Total Assets £31,157.83  (April 2013 £28,047.94 - an 11.1% growth)

I am very pleased with my progress over the three months. In March 2012 I began recording my tangible wealth. Back then it was £22,970. I have grown my net total accessible wealth by about 22.7% and my total wealth (including my pension) by 35.6% in 16 months. My original plan was to grow my wealth over the year by about £4000 from September 2013 until September 2014 which (if you prorate my progress) means that I have almost reached this goal in terms of total accessible assets and more than passed it if you invlude my pension. Arguably it should be acceptable to include the value of my pension as this will form part of my assets in later life.

Originally I wrote a post on a Get Rich Plan and am currently in the middle of implementation. Whilst I have a long way to go, I am currently laying the foundations of this plan. I will now go through each section, briefly:

  1. Frugality - I believe that life should be lived whilst preparing for the future. As such I don't buy into the arguments that you should count every penny. Instead you should get the fundamental decisions right. for example, to automate your savings and commit a certain amount to savings each month.
  2. Budgeting - all going according to plan. My method allows me to ascertain where I may be spending too much.
  3. Saving - I am able to save 20% and above of my monthly net income. I still haven't switched my bank account. However, I really should consider it at some point in an effort to get a better interest rate, especially now that there is a lot more money going through the account. Santander seems to be the obvious choice although I have heard bad feedback about their customer service. Thoughts?
  4. Debt - Although I have two credit cards, I have no debt. I pay them off in full each month. I have one credit card which gives 3% cashback (up to a maximum of £100 a year) and another that gives 0.5% cashback. Read my article to explain how to maximise the cashback on credit cards.
  5. Housing - I am about to move to a new rented accomodation. Rent was £690 per month and will now be £585, not including bills. However, transport will cost an extra £20 per month. Bills will be about £40 higher per month and the local gym is an extra £30. As a result I will virtually break even eith the move. Look out for a future article on setting up finances when moving. For more information on my ideas on Housing read my article: Renting Vs Buying.
  6. Investing - on the whole this area of my personal share portfolio is going well. I have written plenty on this topic recently and so will leave the topic of investing to those posts.
  7. Tax - My monthly savings account is nearly finished meaning that I will have about £3,000 to put into cash ISAs. I need to top up my tax free ISAs before next April. I am now starting to utilize my investment ISA with an ISA stocks and shares trading account.
  8. Job - My base salary is £27,150. In September I am hoping to get a bonus of £1,000 (gross) for passing my exams first time as well as the potential for a bonus and pay rise. Living as a young professional living in London has huge opportunities for networking but of course is highly expensive. I must remind myself that this is (hopefully) the lowest wage I will have for the rest of my life so things are looking good into the future.
  9. Time and Patience - Slowly but surely, year by year, the seeds which I am planting will grow into trees.
  10. Self-belief - check.
As you can see, on the whole things are looking good. There is much work to be done but at 23, I have time on my side.

I would encourage all of you to update your financial position. Feel free to use my post as a template. It helps you clarify what you have to do and where you are going.


What's going on in your personal financial review?

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Disclaimer

Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter