I. Ready to get started
At this stage of your life you are just starting to think about investing. For most this is between the ages of 25 and 35 but don’t worry of you are outside this bracket as many successful people started earlier or later than this. This is the beginning of financial awareness, it is the time when you realise that working long hours to earn more money but then spend it all or not do anything useful with it isn’t enough. You want to be able to utilise your money and you want to learn how to do that. Congratulations this is the first step in a long process.
In this stage research and education is of utmost importance, you need to build your knowledge base and ideally seek the advice of a trusted advisor to assist you to get started on the right path. This is essentially the cornerstone of your investment journey as often the first investment will either give you the confidence to keep going or you’ll get your fingers burnt which could affect your progression. Do your research but try not to self-diagnose; this is comparable to going online and looking up why you have a sore throat. Often you will end up thinking you have a life-threatening disease when in fact you just have a cold. Seeking advice on what is right for your situation and what you are trying to achieve is akin to going to the doctor. This doesn’t mean that you shouldn’t do your own research but there is a lot of conflicting information out there that can often result in paralysis by analysis. You can spend far too much time going around in circles but remember that until you’ve invested you haven’t actually achieved anything so far as improving your financial situation.
III. Testing the Water
Starting with a low risk investment that you are very confident in steady returns is advisable at this stage. All too often I see first time investors trying to be too creative to create “fast equity” which they’ve often heard about at a “get rich quick seminar” or similar event and fortunately or unfortunately such investments tend to be high risk often profess unachievable returns or in some cases are just non-existent solely for the purpose of selling a seminar or training course. My advice is to start small and low risk and build from there as your confidence and wealth and therefore your ability to weather a loss builds.
IV. Investing Further
In this stage, you’ve already made your first investment and hopefully that went well, you’re now looking to build an asset base and move closer toward your long-term goal. You may start to make larger investments or take on more creative projects are your confidence and wealth builds. Don’t get carried away and start to think that you’re an expert (unless you are), an over-confident investor is often a unwise investor so don’t just jump into things. Maintain in-depth research and due diligence at every turn to ensure you don’t get burnt or make the wrong decision for your situation. This phase should focus on capital growth investments, whilst income is important to support costs when your building an asset base you are much more likely to reach your goal sooner through growth then through income. A quick example below;
A £50,000 investment into a 10% NET yielding asset (the upper end of what is achievable) will give you £5,000 per annum. If it doesn’t grow in value, then £5,000 is all you will ever get in a year.
The same £50,000 invested into a £200,000 property with 75% leverage that doubles in value in 10 years means that they £50,000 is now worth £250,000. Do that a few times and you will be much more likely to achieve the income you want in the subsequent phases of your investment journey.
This can be likened to growing and squeezing an orange; when you have a small orange, there isn’t much point in picking and squeezing it because you’re unlikely to get much juice. When that orange has grown big and juicy then is the time to squeeze. The orange is your asset base and the juice is cash flow.
Your investments should be chosen accordingly dependant on the type of return that is most suitable for your stage of the investment journey.
V. Retirement Transitioning
This phase is when you’ve reached the required asset base to generate the income that you require however often the investments you’ve made have been capital growth focussed and may not be generating you sufficient income. This is a common shift to which there are a few solutions; you could sell up and completely shift into income focussed investments or you could liquidate part of your portfolio to accommodate the shift. The answer will differ depending on your situation but it is important to remain commercially minded and not get attached to investments regardless of how well they’ve performed if they are not generating the right type of income for you.
A family friend recently inherited a reasonable sum and invested in ten factories in a regional town of the UK. Aside from being slightly offended that he didn’t ask me for investment advice on what he should do with the money, I thought he was crazy, what could 10 factories in a small town have going for them as an investment? They’re never going to grow in value and surely there isn’t that much demand from tenants, is what I thought. I asked him why he did it and his response was that he had pre-leased them for 20 years at a 10%+ yield and given he is 60 years of age, he couldn’t care less about growth as the kids can worry about that. Little did I know that my family friend clearly understood that he had the asset base required to generate the income that he needed and wasn’t worried about the exit strategy or growth as that will be beyond his timeframe of caring. Not so crazy!
VI. Easy Retirement
If the previous phases have been done right, then this phase is about enjoying the fruits of your labour. Whatever your goals were they should now be achieved and you are able to enjoy life and appreciate the work that you put into getting you here. Now of course you may need to tweak things here and there based upon economic or legislative changes but ideally they can be looked after by someone else.