The Ten Financial Commandments, Part Two
Continuing on from last week’s post, I’m sharing the top financial commandments, as suggested by Maven Adviser Andy Hart.
6. The media do not have your future in mind
The media only have their advertisers in mind. It’s all about ratings for radio and TV, or shifting copies for print media. They’re only interested if it’s bad news – you never hear of billions wiped ONTO the stock market!
Don’t pay too much attention to the news, particularly when it comes to the stock markets. This is not advocating ignorance, but peace of mind. I avoid the news wherever possible, and have systems in place to track what’s happening in the financial world.
7. Disciplined behaviour will ensure your financial success
No matter what it is, if you stick to it, you will win. Week after week, month or year, if you’re disciplined, you’ll succeed. This is true in your personal life, too, and you’ll find you have a vice of your own that can hamper you.
Discipline is hard, and the key is to form habits – be aware, though, that it’s easy to form bad habits which can then be hard to break. Financial success is about doing simple things over and over again, even when it hurts, and saving that money even when you don’t want to.
8. Today's news is tomorrow's fish & chips wrapper
Think about it – what bearing will today’s news have on your 30 year retirement plan? This ties into commandment six, but it’s more about timescale, particularly with your investing and your planning.
I hear often, and it’s true to an extent, that the world is economically in a mess at the moment. I counter that by asking people to tell me about a time when things haven’t been in flux.
We’ve come through the credit crunch of 2007 and 2008, and that was probably the most significant financial storm since the 1930s. There have always been crises, whether it was the technology bubble or the Big Bang in the 1980s.
Even the worst crisis of the last 80 years will only be a blip on your financial plan. It may be a big blip, but that’s all it is. If your view is a short timeline, ups and downs within that time will look significant. But if you widen out the view to ten years or more, those market wobbles are insignificant.
9. Tax is likely to be your biggest expense, so learn to control it
I talk all the time about managing costs, and it’s worth remembering that tax is one of the biggest expenses you’ll ever face. I’m all in favour of paying taxes – if we drive on the roads and use the hospitals, we should pay our fair share.
I’m annoyed by the tax dodges that celebrities employ, although they’re often caught out and end up with huge bills to pay. However, I’m also in favour of reducing the tax burden, because there are plenty of legitimate reliefs and allowances, such as ISA allowances, pension contribution allowances, EIS, VCT, which are there to be used.
The government puts these in place because they know that by offering these tax breaks, the economy will be better off and money will flow.
If you have an adviser, he or she should be looking to save you money wherever possible, and if you don’t have one, this could be the difference between you winging it and getting professional assistance.
Use your ISA allowances, make the most of pension tax relief and make sure you use your Capital Gains Allowance if you’ve got enough money to make it worth doing so. Also consider venture capital trusts and enterprise investment schemes – in the right situations.
But remember, tax is never a primary consideration. Don’t ever do anything for tax reasons that you’re otherwise comfortable with – that’s a golden rule.
10. Never Forget Commandment One!
It seems like a bit of anti-climax, but it’s so important to remember that the stock market rewards the patient and punishes the rest. Even the investor with the best of intentions and self-discipline can still be swayed by greed when things go well, and fear when things go badly.
Perhaps the biggest danger is complacency, which can sometimes manifest itself as arrogance. It can be really easy for experienced investors to think that they know what they’re doing, which leads them to trade aggressively to try to beat the market, but it’s a hiding to nothing.
Remember, only one in four managers beats their index over three to five years. If you extend that timescale to 10 years, you’re looking at about 1 in 100 who consistently beats their market.
The fact is, you can’t do it. These guys are supposed to be professionals, so if they can’t do it, nor can you. Instead, set things up right, with multi asset passive investing, and let it run. Rebalance it when necessary and don’t try to beat the market, because you never will, and certainly not consistently.
Hopefully, these commandments have been helpful and will give you some perspective as you go through your own personal finance journey. It can be really easy to forget these basic rules along the way, and even I do it sometimes.
I’d love to hear your thoughts, and let me know in the comments below if there are any commandments that you’d add to this list.