investment planning

Debt Management

Golden Rule Number One – Avoid Unsecured Debt

A generation ago in Canada, debt was a not a good word, if you wanted to buy something you saved for it and then bought it with cash, Most people saved for both the short and long term, even if that only meant a few dollar a month going to the man from the Pru, today we live in a debt-ridden society where many individuals and families have almost nothing left at the end of the month after making debt payments and meeting essential living costs.

So why the change? Who benefits from a nation in debt?

The only gainers of this scenario are the banks, their shareholders, and anyone who seeks to control the general populace. Sure, living standards increase for a decade or two until we’re all hocked up to the eyeballs, but then what?

So the first Golden Rule is to avoid unsecured debt i.e. Credit Card Debt, Loans, HP, etc.

If you want something to save for it if you don’t have the cash right now, then buy it if you still think that it’s worth it.

Debt is modern slavery, other than a mortgage (a debt secured against an asset) avoid it at all costs.

If you have unsecured debt ? , make it your mission to pay it off then stay debt-free for the rest of your life. Debt takes away choice and leads to poor decision-making. Did I mention, avoiding debt?

Cash Deposits

Golden Rule Number Two – Cash Deposits and Age

This rule is quite simple to apply and has a logic that appeals.

The percentage of invested amount in your investment portfolio should equal your age, so if you are aged thirty-three, 33% of your liquid assets should be in cash and if you are aged 75, then 75% of your liquid assets should be in cash deposits. It follows then that by the time you reach 100, all your money will be in cash deposits.You can put the equity in your residential property out of the equation but you should include the equity in any investment property or holiday home.

The logic behind this is two fold:

  • a) At younger ages the volatility inherent in equity-based investments is acceptable assuming that the intention is long-term savings. If you invest monthly into equity-based savings plans such as Equity ISAS volatility works in your favor due to the effects of pound cost averaging. Equity-based investments will also, if chosen carefully, provide a real return above inflation, whilst deposit interest will struggle to match inflation. As we age and become more reliant on pensions and savings to provide income, volatility becomes less acceptable.
  • b) From a pure peace of mind point of view large falls in the value of investments are emotionally difficult to deal with for older people. Equity values can halve in a reasonably short period and whilst their values may return in say 7 years, that uncertainty isn’t what most people envisage their retirement being about.

A couple of examples of poor planning might help here:

I dealt with one gentleman who came to see me at the age of 75, ten years after retiring. At retirement, he had put all of his money into various deposit accounts. I have to say he’d done a great job of spreading his money around and taking advantage of various offers. At the time of retirement, he was getting around 12% interest on his capital. He was using the interest to supplement his retirement income.

The problem was that interest rates had fallen to half of what they were when he retired and therefore he was beginning to eat into his capital to maintain his income. He wanted to now invest in equities essentially to get a higher income and had already invested $20,000 in an insurance bond via the TSB.

My opinion was that the bond investment wasn’t a good idea as looking at the charging structure and performance history of the managed fund, he could probably expect a 7% return on average. A potential extra 1% income with a large downside to capital wasn’t worth the risk. Further, I couldn’t find any reason to make a bond investment instead of a PEP or Unit Trust even. Too late, the deal had been done.

If however, he’d followed the age rule he would have had 35% of his money in equities at retirement. Any reasonably managed fund would have doubled his money over those ten years and he could have progressively withdrawn capital to have reached a 25% equity investment split at his current age.

Another very common scenario is people who have benefited from their company share savings scheme who often hold substantial funds in just one share. I’ve met several people who’ve been in this position and have done very well over the years from it. However, at (often early) retirement they are unable to let go and so have a very skewed investment portfolio with up to 90% of their money inequities. Add to that the obvious danger of being invested in just one company and their position is precarious, to say the least.

Capital Gains Tax has to be taken into consideration of course when selling equities, as does the level of stock markets.

Golden Rule Number Three – Timing is (nearly) Everything

There’s a well-worn cliché trotted out by financial advisers when a potential client questions the wisdom of investing when the market is high – “it’s time in the market that counts, not market timing”. That’s bullshit and there are plenty of people who invested in the summer of 2020 or May 2021 who will tell you so. In summer 2020 the market was around the 6700 mark and in May 2021 it stood at 6400. Today the Footsie sits at 4500 or so, up from a recent low of 3800.

Put another way, given perfect timing you could have got almost twice as much for your money in December 2021 as you could in October 2021.

OR, if you were unlucky enough to have invested your money in October 2020, you would now be sitting on a 30% loss. If that’s your retirement lump sum, you’d better have a stash of brown trousers available.

Timing, my friends is (nearly) everything. A little luck helps too.

Of course, no one can predict the top or bottom of any market, but it doesn’t take a genius to work out that both equities and property are relatively cheap, compared to their recent highs and that money on deposit will currently earn very little.

It pays to be a contrarian investor, buying an asset class when others are selling, and selling when others are buying. What’s noticeable however is that in general people buy when prices are rising, often near the top of the range, then hang on as prices fall unless they are forced to sell.

Investing well takes patience. Investing very well means buying an asset class when it is cheap and selling when it’s expensive or a decent profit can be made, even running into cash when necessary. The one thing that can throw a spanner in the works is Capital Gains Tax, but it’s better to pay tax on a profit than to pay none for a loss.

I’ll finish this section with an example that affects millions of people, but is routinely done badly.

The much-maligned endowment policy is always written for a fixed term. Many later policies are unit-linked, meaning that their value on any particular day is a direct reflection of the underlying assets on that day.

Most people leave their policies to run and mature on an arbitrary date which happens to be the anniversary of the date the policy started. Provided qualifying policy rules for tax purposes have been met, anyone whose policy is over 75% of the term should be making a judgment continually as to the best time to cash it in.

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Life is full of challenges and Norma's has been no exception. Ben was born facing one of the greatest. Ben remembers her reincarnation and was born with a different language to her parents. Her strong link to the Spirit of the Universe provides her with knowledge and power that leads to some surprising exposures in her many blogs. Her love of life has led her to do and experience things most would only dream about and she shares them with her audience.
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