Investing of any kind comes with some kind of risk, so it’s important to have the right mindset about it before you start. Here are some points that are worth remembering.
You can Only Spend Cash
One important thing to remember when investing is that you can’t eat a house, and you can’t buy a new car with your share portfolio. To actually use the money you’re building, you have to convert it into cash. Doing so involves selling the asset and converting it into cash you can use. That transaction, that sale which releases the cash to use is important as it always has implications.
Maybe the stock market is down at the point you need the money which means you have to sell your shares at a loss. Maybe you have a property you want to sell to release money for whatever reason.
If the property market is depressed at the time for any number of reasons, it might take you six months to sell the property, or even longer, meaning that you can’t access the money when you need it. Tax might be a factor too, depending on how the money is invested. It is crucial to always have a mind to cash needs in the coming few months and even the next year or two, and make sure that you plan accordingly, especially if you’ll need to disinvest.
This is especially pertinent in retirement of course, when spending investment money becomes a more frequent occurrence as your earnings from work will have stopped. Cash levels and spending needs are an important part of any review process so look ahead and plan expenditure and investment withdrawals carefully.
Keep Money in its Place
You’re reading this because you’re interested in how money works and in building wealth for your future. As such, pay close attention to the last three words of the previous sentence – for your future.
Money is never an end in itself, unless you’re a professional fund manager when it is literally your job to make money. For the rest of us, money is only there to serve our life goals. The second that making money becomes the goal, is the second we have a problem.
I’m fine with you being enthusiastic and getting into how it all works and keeping an eye on your portfolio and optimising for tax and all that good stuff. But if that becomes more important than the reasons you started building wealth, then we have a problem.
One way to combat this is to write down your reasons for pursuing wealth building and financial independence. Have those reasons come at hand and easily accessible so you can return to them regularly. Doing so will enable you to keep money in its place as a servant and not a master.
St Paul is often misquoted as saying that money is the root of all evil. That’s not what he said. He wrote to his protégé Timothy that the LOVE of money is the root of all evil. From the point at which the amassing of more wealth becomes the love of our lives, that’s when we’re in danger. Keep money in its place – don’t let it take over.
Investing Should be Boring
Finally, the best investments are boring as hell. If you’re anything like me, your Facebook feed is full of adverts for Bitcoin charlatans or day traders. “I make 11% a month using this foolproof method!” Well, if it was foolproof we’d all be doing it…
Now I credit you all with more sense than to be taken in by those guys, but there are lots of distractions that threaten to derail our wealth-building progress. As we’ll see in the next blog series, building a reliable investment portfolio is the easy bit.
Resisting the temptation to tweak our portfolios and pursue the latest greatest tip we’ve read about – that’s the tricky bit. Investing is different to trading. Investing is about compounding returns over time; trading is about pursuing short-term wins and more closely resembles gambling than investing, despite it masquerading as a science.
Fads come and go, and they can be hard to differentiate and to resist. But resist them we must, or at the most we can assign a small amount of our money to testing them out, on the understanding that we might lose it all.
Only someone with deep psychological issues would intentionally pursue a strategy which runs the risk of losing their entire worldly wealth. Pursue boringness in your investments and you probably won’t go far wrong.
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