Investing versus trading

Invest. Don't trade


What's the difference between investing and trading?

With good and wise intentions many people want to start investing in stock and shares. In fact I would encourage people to do so. 

Unfortunately what most people do one of three incorrect things:

1) investment decisions are based on tips from friends
2) investment decisions are based on a general opinion as to whether a Company is good or bad
3) investment decisions are based on looking at a chart and trying to predict the next movement in share price

All 3 investment decision strategies will eventually lead to losses in the long run. This is speculation and should be avoided. You do not make wise investment decisions based on speculation. That is for professional traders and NOT FOR YOU! 

You should make your investment decisions on sound principles of valuing a business as I've explained in Value Investing or my Investing Principles series.

To make any investment decision on the above three bases is to try to be a trader and you will surely lose money. Remove your ego when investing. You are not on Wall Street. Your investment decisions should be made with a long term view in mind. Think in years and not days.

A simple method to check whether you're investing rather than trading is if you can explain your investment decision in terms of returns, valuation and business analysis rather than in terms of predictions or past and future price movements.

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Assets

Assets Assets Assets!!


Wealth = Assets


If you want to get rich then you need to build assets. Unless you have an extremely high paid job you aren't going to get rich without assets!

Okay so you've got the picture: build assets.

I'm my mind there are 3 types of assets that you need to focus on, plus one additional investment. The three main assets are property, fixed income investments such as cash and bonds, and equities or other investments in Companies. The additional investment is in a pension.

Ideally you want to put money into all 4 investments simultaneously to get a good spread, building a diverse portfolio of assets. However this may not be practical so I will go through each in turn, explaining how you should prioritise each in turn.

Pensions


Your pension should be your priority, even before your savings. If you have a Company pension where they match your contribution then you should try to maximise your contribution to fully utilise the amount that your Company matches. For example, my Company matches 6% of my gross salary if I contribute that much. So I invest 6%, they match and so I end up with a pension contribution of 12% of my gross salary by the year end. Furthermore, the government gives tax relief on pension contributions. So if you're a basic rate tax payer then for every £80 you contribute, the government contributes £20.

It can be quite confusing to know how much you need to save into a pension. For more information and guidance on calculating how much you will need check out my previous article on the subject.

Cash and Bonds


Cash is a highly liquid asset meaning that you can access it quickly and move it around. You need a portion of your wealth in cash so that you can cover immediate expenses, purchase other assets and cover yourself in the case of any emergencies.

You should have a standing order each month from your current account (into which your salary is paid) into a savings account each month. Try to have at least 3 months worth of expenses in cash. Then add any excess into bonds, equities and property.

Bonds are essentially a title to interest. You give the bank/ financial institution some of your cash for an agreed period (typically one to five years). After that period the financial institution will return your money with interest.

Personally, as I am young I don't want to tie my money into bonds. This is because I am looking to buy at house in the next few years and so can't afford to not have access to my cash. Furthermore, I am happier to take a little more risk with my cash as thus invest more heavily in stocks and bonds.

Equities and Investments


Unless you take a particular interest in stocks, shares and companies then I would suggest you don't attempt any stock picking yourself.

Instead, for the majority of people I would suggest having a portion of their savings in a low cost index tracker. This is an investment fund that tracks the market and should increase in value over the decades.

In my opinion everybody should invest stocks and shares regardless of your risk appetite. If you don't require access to the money for a substantial amount of time (5 to 10 years) then you should definitely be investing. You only need a couple of hundred pounds/ dollars to begin investing in index trackers. The key to successful investing is to keep your costs down. Anything that looks like more than 0.5% (of the money you've) charges then you want to avoid it like the plague.

Property


Investing in property is by far the most difficult of investments. The minimum amount of capital requires makes it far more difficult to make a reasonable investment.

Many people believe that the home that they buy to raise a family is an investment (buying your first home). I disagree. A house is not an investment. An investment is something that offers you a return as in the case of interest with bonds or dividends with stocks. There is no increase in your cash flow from owning a house. Only, there is an increase in outgoings as mortgage payments bite.

Nonetheless, many people aspire to be home owners. I would suggest that a person save for a home that they can reasonably afford. This means that they shouldn't stretch themselves in any way when it comes to a house. You know that figure you have in mind for your first property? Halve it! A good gauge if you're overpaying is that your mortgage costs in total should not be anywhere near one third of your net monthly income. Ideally, you should aim to get it even lower.

Once you've purchased your home and are growing your assets and cash inflow, then you can start thinking about an investment property. Even though you will be getting a tenant(s) in to help to cover the mortgage, you need to be in a situation whereby you could cover the mortgage costs should you be without a tenant for an extended period. You should be in a position such that if you had to you could afford to cover all your mortgages and still live at the same standard of living. For my property portfolio strategy read.

Read my other article to help to understand what the balance of your assets should be.


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.

How to Get the Best Car Finance Deal

Financing a car


Buying a property is one of the biggest transactions that you will probably ever do in your lifetime. The second biggest transaction will probably be in relation to a car purchase. This is the subject of the following guest post from a financial writer looking to offer their insight into the often confusing world of financing a car.
Car finance is readily available, even if your credit history is poor. However, it's also big business, with car dealers sometimes earning more commission on the finance than they do on the car itself.
Three quarters of the 700,000 new cars bought between March 2012 and March 2013 were bought with car finance of some kind. But with the complexity of finance options available, how can you be sure you're getting the best deal?


Do Your Homework


Before you even start looking for a car, take time to learn about the different finance options available. Hire purchase, leasing, a personal loan and personal contract plans all work differently and have their own advantages and disadvantages. It's important to choose the right car finance option for you and your circumstances.

Be Sums Savvy


A salesman will work hard to get you to sign up to his preferred method of finance, and there are all kinds of legal but misleading ways of presenting the figures to you in order to make an option seem more attractive than it really is.

Make sure that you are given the APR. This is the only rate which will allow you to compare one option properly against another, as it's the only one which includes fees and interest. Even then, be sure that you're comparing finance of the same duration and loan amount.

If you're given daily or weekly costs, stay alert. Of course it sounds cheaper to say that your new car will cost you only £8 per day than £240 per month or £2880 per year - but don't fall for this. Always ask for the total amount payable.

Another common ruse is for the salesperson to add a few years onto the loan in order to make the repayments look cheaper. Yes, you'll pay less each month if you pay over five years instead of over three, but it's certainly not cheaper overall.


Be Prepared to Haggle


If your credit is good enough, get a quote for a personal loan from your bank and take it with you when you buy your car. Use this as your starting point. Anything more expensive on offer from the dealer is a no-no, regardless of the bells and whistles they attach to it.

You can also visit more than one dealership and get quotes from each one. You may well find quite a considerable difference in what you're offered, depending on all kinds of things from how close the salesperson is to their target to which cars they're pushing hardest that week.

If you like the look of a deal you're offered, but it's close to the personal loan figure or slightly above it, ask for extras to be included with the car as part of the deal. If you don't ask, you don't get.

Essentially, the golden rule is this - don't go into arranging your car finance deal with your eyes closed. Many salespeople work hard to get you the best deal available and they are not your enemy. Courtesy, respect and professionalism go a long way on both sides of the deal. For those who are slightly more unscrupulous, however, the whole process is a game. Learn the rules and stay one step ahead.

This content was provided by Your Car Credit who are specialists in used car sales and Car Finance for people with Bad Credit.

Savings and bonuses

Savings Recapped

I've written a couple of articles previously on the subject of savings. My article Savings made Simple outlines how to set up your savings by automating them to come out if your paycheck each month. 

I suggested that you should save set up 10% of your net disposable income (income after your tax and pension has been paid). You could then try to increase this percentage over the following years, particularly as you receive pay increases. If you receive a pay increase, say 2%, it will not hurt your finances at all if you decide to save 80% of that pay increase. For example, let's say you earn £20,000 per annum and receive a 2% pay increase. That's a further £400 per year that you didn't receive previously. Psychologically, it would not be too damaging to your finances if you were to save £320 of this straight away. You should adjust your standing order that you set up with your bank to transfer to savings out of your paycheck each month to now incorporate this pay rise.

Bonus culture and savings


In much the same way as pay rises, it's good habit formation to save a portion every time you receive any bonus - even the Christmas Bonus! Even if you receive a small token bonus of £100 make sure you save 20% of it! Transfer it directly into your savings account. It is all about encouraging good saving habits. Likewise if you receive cash for your birthday etc, make sure you save a portion of it!

Savings habit formation


As you can see, building savings is straightforward. You need to form good saving habits through the automation of a portion of your monthly paycheck into a savings account and regularly looking to save a portion of any income. 

Once you've formed this habit you will notice that you are paying yourself first! You are prioritising your future over all else. Sit back and watch your wealth grow and be proud of what you are achieving!


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.

The Basic Rules for Wealth Creation

Wealth creation rules


The following post comes from Adam at http://moneybulldog.co.uk, a UK blog discussing all things personal finance. You can follow money bulldog on Facebook.

Creating wealth is one of the most deceptively difficult things to do in life. It might seem that all you have to do is keep on saving month after month. However, if it was that simple wouldn’t we all be rich? In fact, many people struggle to save and often find their level of wealth going backwards over time.

Perhaps the most frustrating aspect of trying to create wealth is that it is underpinned by some simple ideas, even if carrying them out is more difficult than it first appears. The following are some of the main aspects to consider.

Earn More Than You Spend


The initial starting point for making money has got to be that of earning more than you spend. Sure, some people borrow money to invest but this is a high risk strategy which I would only consider under certain circumstances. The safest base to start from is a decent income and a lifestyle you can afford. If you don’t have these two things then sooner or later you will run into financial problems. Of course, if you don’t earn more than you spend then you have a couple of different ways to sort it out; earn more or spend less.  Neither of these things is particularly easy to do but the long term benefits make it well worth taking time to work out your options. Maybe a new career, changing your eating habits, a cheaper car, moving to a different city or an overhaul of your current loans will help you achieve this important goal.

Invest Wisely


Ok, so let’s assume that you get the first step done well. Congratulations, you now have some spare money each month. What are you going to do with it? If you are going to create wealth with it then the next step has to be to invest it wisely. Leaving it sitting under a mattress or in a current account at your bank isn’t going to make it grow. So how will you make it grow? Well, there are a number of different ways of doing this. If you like to take a chance with your money then the stock market gives you the chance to make some big profits. However, you know by now that share prices can go down as well as up, so maybe this isn’t the right approach for you. The question then is to find the right level of investment for you. If you have enough money to play around with then the best idea is to diversify. Keeping some cash in a low risk investment while investing other amounts in riskier but potentially more rewarding enterprises can help you to grow your money if you get the mix right.

Get Passive Income Rolling In


If you earn money through a job then the amount of cash you bring in is directly related to how much time you work or how well you do it. A better way of building up your savings is by getting passive income coming in. This is money which you earn on a regular basis without doing much. It could be from a website you have set up and now let someone else run, commission from products you have already sold, rental income from a property or anything else of this sort.  If you have a good level of investments and can maintain your lifestyle without working too hard, then you can consider that you have cracked the wealth creation business.

Overspending Despair

An overspending story


Overspending is absolutely criminal if your goal is to become a multimillionaire. The following article is a quick example of how damaging it could be, if left unchecked.

I was recently chatting to a work colleague about personal finance. She recently began work, earning a decent paycheck of about £21,000 per annum or about £1,550 per month after tax. Even better, is that she lives at home as so her only necessary outgoings are £300 per month on travel and £200 nominal rent to her parents.

My immediate thought was "wow, you must be putting away at least £700 per month". I was shocked to find out that she managed to put away only £200 each month. 

Her budget each month was as follows:
In: 1,550
Out
Rent - £200
Travel - £300
Going Out - £360
Shopping - £490
Savings - £200

I couldn't believe it! £360 per month on going out! £490 per month on Shopping! No pensions! Barely any saving!

You may be thinking "it's her money. She can do with it as she likes!" That's fair. However, she's planning to move out of her parents home and rent in a year or two. What I'm wondering is how she can expect to pay for a rent if she's so used to spending so much on going out and shopping? Some of you may think, as she did, that she'll manage to adjust her spending accordingly, or she'll wait until she's earning more.

Personal finance is all about psychology and mindset. Everyone wants to be comfortable in their finances (they don't have to necessarily share my goals!). Generally, no one wants to accrue debt. Unfortunately, that is exactly where my example will lead. There is no financial discipline being showed. The ONLY reason she is able to sustain this lifestyle is due to her parents charging a relatively minor rent.

I wish her all the luck in the world and hope that she doesn't run into trouble. But the harsh reality is that personal finance isn't about luck. You need to organise your finances. Know what you've got coming in and going out. The following articles should teach the basics of wealth creation and of managing your personal finances.

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.

Diversification

Diversification Demystified

One of the important features of becoming and preserving your multimillionaire status is diversification. So as not to be too technical, the following is a brief definition of diversification from the Wikipedia:
“Diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents.”
- Wikipedia, “Diversification in finance
It is not immediately intuitive how diversification of assets,  creating multiple income streams reduces your risk. Ideally you want to try to maximise your returns but reduce your risk - fair?! The following story should demonstrate the benefits of diversification. Story time...

SCENARIO 1: You’re on a game-show and the host offers two choices:


“I am going to flip one coin. If it’s heads you get £10,000. If it’s tails you leave with nothing. However instead of the coin flip I can offer you an alternative: I won’t flip the coin and you can have £4,000 right now?”
What do you choose?
Some people take the £4,000, say thankyou very much and run. These people preferto have something guaranteed, rather than risk the possibility of receiving nothing. They may never win £10,000, but they won't walk away with nothing either. 
Other people reason that they came with nothing and might as well take the chance to walk away with £10,000. They gamble!
But what do you do?
Before you answer let's think about the problem mathematically.  Probability states that your return from the coin flip is £5,000 (1/2 X £0 + 1/2 X £10,000). Since this is £1,000 more than the guaranteed £4,000 a rational and risk neutral (totally indifferent in their risk tolerance) person should gamble rather than accept £4,000.

SCENARIO 2: You’re on a game-show and the host offers two choices:

“I am going to flip ten coins. Each coin will be worth £1,000 if it lands on heads. If the coin lands on tails then you receive nothing from that particular coin. Although you will have 9 other coins to flip. Alternatively, instead of any coin flips you can have £4,000 now?”
What do you do? 
On the surface scenario 2 appears different to scenario 1. You may think that you now have ten chances to get £1,000 at least and so you are unlikely to walk away with nothing. As such you take the gamble rather than the money. Alternatively you may disagree and argue that you would still rather have £4,000 guaranteed.
What do you do?
Again, let's consider this problem mathematically. Theoretically, your pay-off in scenario 2 does not change from scenario. In both scenarios you are statistically likely to walk away with £5,000 from the gamble (1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000 + 1/2 X £1,000).  Regardless of the expected payoff being £5,000 I would speculate that more people were willing to take the gamble in scenario 2 than in scenario 1.

Why is this the case, especially considering that the expected payoff is the same?

It is because in the second scenario the outcome is spread across 10 different coins  rather than risking the outcome all on one flip, as in scenario 1. That is diversification - spreading the risk.
In scenario 2, with 10 coins your returns will almost certainly not be £10,000, but then again you're very unlikely to walk away with nothing. This is the benefit of diversification. It helps sustain wealth across many different outcomes.
Did you take both gambles? Let us know in the comments!
Do you like what you’ve read? Tell your friends & family by sharing it with the Facebook and Tweet buttons below. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), or find me on twitter @millionairer0ad. Whether good or bad, I want to hear from you all.

Free Finance Guide

The following is a guest post from a financial writer from Freedom Finance, one of the UK's largest largest Loan Brokers. These guys have just created a free financial guide for all of you to download. The guide is essential reading for anyone looking to borrow money and is a relatively easy read when compared to other information out there!
 
 
If, like me, you have ever struggled with the complicated world of finance and, in particular, the terminology, then don’t worry- help is at hand! Loan broker giant Freedom Finance has put together a great little e-book to answer all your borrowing queries or credit questions in general, and it’s absolutely FREE! In just a few short, easy to read pages, Freedom Finance covers pretty much anything you need to know about borrowing and how to protect and enhance your credit worthiness (absolutely vital in this day and age!).
 
This invaluable aid gives an honest explanation of the types of loans on the market place (e.g. secured loans, unsecured loans, and consolidation loans), their advantages and disadvantages and a summary of what product suits a particular circumstance best. The guide also gives its readers tips on how to improve their credit score, and how not to make the same mistakes going forward. Not only this, but it has its very own jargon-busting glossary which is designed to fully explain those often alien terms surrounding the financial industry.
 
The Guide To Borrowing by Freedom Finance is absolutely free, and there is no obligation to use their services after the guide has been downloaded. It is simply intended as a helpful tool to those seeking a loan, to ensure that potential borrowers are borrowing responsibly, and doing so armed with all the facts. Thanks Freedom Finance, we could definitely use the help!  You can download the e-book from the Freedom Finance homepage!
 
Interested in guest posting or writing a sponsored post? Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment.

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