CONTENTS 1. Shock Warning 2 2. Income is not wealth 3 3. No debt is a good debt 4 4. Do things differently 8 5. Find out what your boss earns 9 6. Make sure you love what you do for a living 10 7. Recognise the value of time 11 8. Ideas are the new hard graft 9. Invest from your surplus 13 10. Get a good broker 15 11. Be tax smart 16 12. Invest in money-makers, not flashy pipe dreams 17 13. Diversify, Diversify, Diversify 18 14. 19 15. Invest for income 20 16. Understand how to recover from losses 25 17. Avoid Investment/Trading Seminar Scams 27 18. Understand that conflicting advice may all be correct 29 19. Investing on news 30 20. Understand the jargon and the charts 31 21. Do not under-estimate your life-expectancy 32 22. -fashioned saving 32 23. Enjoy without addiction 33 24. All bulletin boards are positive 34 25. Aim for multiple income streams 35 26. You never know enough 36 27. 37 1 Please turn over...
SHOCK WARNING This Guide is not going to make you rich overnight (at least not tonight, unless you are extremely lucky). This guide is not for those who are hoping for a get rich quickbecause, although it is unfashionable to say it there is not really any such thing. No, this guide is different. You have not just wasted money on yet another scheme or system which will ultimately fail despite the claims made in the advertising.What is it then? Well this is a guide to help you accumulate wealth steadily and sensibly. You may indeed have great rises in financial wealth in short periods of time. You may also have to take some losses. That is all part and parcel of this experience. What we are aiming for is that in the long term, your gains will outweigh your losses by some considerable distance. You should also avoid some of the mistakes that many people make. In fact, you should be able to avoid making the mistakes that MOST people make. In the wealth building game that is certainly true. Those who have the knowledge are able to capitalise on how the system works. The rest are simply going about their daily lives hoping that somehow things will be different next year, without actually doing anything about it. Well now is your chance to do something about it! 2
Secret Number 1 Income is not wealth Your biggest barrier to attaining wealth is yourself. It is no use blaming everything and everybody else if you are actually living your life in a way which is not helping you to build your wealth. Ultimately, you will only become wealthy if you spend less than you make each month. Most people think that you need to have an enormously high monthly income to be considered wealthy. Actually there are many people who have lower level incomes but act more sensibly with their money and so overall are wealthier. Any fool can get a high income but the same fool will spend it all so that there is nothing left when that income ceases. Please understand Income is NOT wealth. In financial terms (for there are other types of wealth), your wealth is the part of your net worth that makes you money (either income or capital growth) without you needing to work hard for it. So for example, whilst a teacher may work hard each week to get their monthly salary, somebody with a property portfolio can be paid each week in terms of rental and capital gain on their houses, for doing relatively little. If they were to add to this some high dividend paying stocks, and maybe some regular returns on sales of a book they wrote some time ago, you can see how they would be considered wealthier than the teacher. They could actually continue to live in the manner they have become accustomed for as long as their portfolio paid out which would normally be longer than a normal salary. Even better, they would not have worked themselves into an early grave in the process! Ask yourself this question. How long could you continue with your normal spending habits, if your regular monthly pay were to be stopped? Your aim should be to make it so that a regular monthly salary from an employer becomes a nice bonus! - you will forever be bound by the lie that it takes a high income to become wealthy, and it requires working all the hours in the day and night to achieve that salary. Believe that - and financial independence and security will always be just out of reach. 3 Please turn over...
Secret Number 2 Although most of us will go through life needing to borrow money at some point or other, be it to ease cash flow by the use of a credit card, or by taking out a mortgage on a family home the paying of interest will of necessity mean that we have paid back much more than we borrowed. This is a sure fire way to eat at your wealth. The more debt you take on, the more difficult it will be to get out of it. It is like a drug, and it can destroy you in the same way. Any debts you take on need to be targeted and cleared as soon as possible Yes, even your mortgage. What should I do first clear the debts or invest? As I said, we all have some debts at some point in our lives. It may be that we are still faced with a student loan after university. It may be that we needed to take on a loan to buy a new car (more on that later), or it without exception, we will have a mortgage. And then comes the quandary: If all my money is pumped into paying off the debts, I will not be doing any saving for a rainy day or for my life when I have retired. Thankfully, this dilemma can be solved with a fairly simple calculation. The answer depends on two variables: 1. How much interest you are paying on your debt, after tax. 2. How much interest you expect to earn on your investments, after tax. Please note that there are two types of debt. At one side we have the worst kind - very high-interest debt that comes from things like credit cards and store cards. This kind of dead is lethal and should really be avoided unless absolutely necessary. It should only really be used to aid cash flow, and it should be paid off each and every month if at all possible. The second kind of debt is the lower interest variety;; things like the mortgage or student loan. Often, the interest on this kind of debt is low enough that it may worth holding onto the debt for its full term. The bottom line is: If you can guarantee a higher after-tax return by investing than the after-tax interest rate you would pay on your debt, you should go ahead and invest. If not, you should clear the debt first. 4
Here are some examples for you: Example 1 Imagine you have a 30 year, £150,000 mortgage with a 4 percent rate. If you expect to earn an after-tax return higher than 4% on your investments (the odds are reasonable that you will if you have a long-term view), then you should invest rather than pump additional funds into the mortgage. Example 2 Imagine you have a £10,000 credit card debt with a 22% interest rate. You should only invest if you think you can earn a 22% after tax return on your investments. The average return on the stock market has been somewhere around 11-13%, so this seems a risky proposition. In this case, it would be foolish to invest and you should instead work on clearing the debt first. KEY POINT: You need to do what is best for building wealth long term. Many people cannot see that paying off a debt is actually saving them more money than they would be able to make any other way. Do the calculation and work out what is best for you. Credit Card Debt is Deadly How to find the money get out of credit card debt Many people struggle to pay more than the minimum balance off each month, and as such, they never eat into the debt. Here are a few tips about how to get rid of the most deadly debt of all. Until this has gone, 1. Do you have any investments you can use at this stage? As you will have seen from the last calculation about whether to invest or pay off the debt with credit cards it is always better to pay it off first. Therefore, if you have money in savings accounts or invested in bonds or stock, it is more than likely in your best interests to use that investment to clear your debt at this stage. Remember, if your investment is not inside an ISA, it is taxable. It is subject to capital gains tax and you will pay tax on the dividends. As pointed out earlier, it is debateable whether you will ever beat the 25-29% needed to make it worth keeping the investment rather than paying off the debt first (even if it is inside an ISA). Cash in the investment and use it to lower your debt. 5 Please turn over...
2. Do you need all that stuff? A life-laundry is a useful way of cutting down our debts. When was the last time you read those books or rode that bike? Are you likely to use the tent again? Why not sell it all on eBay or Amazon Marketplace. Making a few hundred pounds at a car-boot sale could also help to cut down your debt. 3. Ditch the subscription lifestyle Many of us subscribe to Sky and to a daily newspaper, or a monthly magazine. We also pay for extra insurance plans on our mobile phones and electrical appliances. We love the fact that we can use 900 minutes of talk time and 3000 texts, with unlimited data download on our mobile plan. However, all this adds up and we need to decide whether we want to become wealthy or not! When was the last time you exceeded the data download of the mobile package below yours? What about the talk time? TV? How often do you actually read the paper? Could you pick one up on your way to work instead of having it delivered? Small changes in your monthly subscriptions can actually save hundreds of pounds which can be channelled to paying off debts. 4. pay for the brands wh We are all suckers for advertising (otherwise companies would not invest -alternatives in the super-market. Fill up the car with fuel from the supermarket rather than paying the premium price of the named brands. Go to the local café rather than the big brand and big price COSTA or STARBUCKS. All the money you save will help you to cut down on your debt. 5. The Snowball effect The idea behind getting rid of your debts is that once gone, you will have more disposable income available to put towards your goal of becoming wealthy. People often wonder whether they should attempt to target the largest debts first, because they are accruing the most in terms of interest. However, it is quite demoralising to see how little difference you are making to a large debt. Meanwhile, your smaller debts are also growing and you end up standing still. You should pay the minimum balance on each debt, and channel all the extra money you have made by following steps 1-4 above, into clearing the balance of the lowest debt. 6
Once that debt has gone altogether, you take the money you were paying to that and channel it onto the next largest debt. Now repeat the process until you have only one debt left. All spare income can now be targeted at removing the final debt. In effect, you have gradually increased the amount of spare money simply by knocking off one debt at a time. This is ffect. Remember, even small amounts will make a difference. It only takes a handful of snowflakes to make a snowball this will get the ball rolling. And in the long run even a few pounds a week extra will save a thousand pounds over the year on a credit card bill. KEEP AT IT it is really worth it and will unlock all the other secrets in this guide. 7 Please turn over...
Secret Number 3 Most people, believe it or not, will continue to do the same things that they have always done and the same things that their parents have always done even when they know it has not brought them success. If you look at your parents, and discover that they worked extremely hard all their life to earn a reasonable salary, and then had to cope with a reduced income upon retirement do you want to be in the same boat? If not, check yourself. Are you doing anything differently? Are you planning at the moment on relying on your company pension (or even your state pension) to get you through your retirement years? Are you hoping that things will just be alright? Well wise up. If their method You have made a good start by buying this guide. This will help you to think differently. But remember, you will also need to DO things differently. 8
Secret Number 4 OK So I said that income is not wealth. That is true. However, whilst you are working on building your wealth you will be relying on your income, and a high income is a much easier starting point. Now whatever your line of work is, it is important to aim for a job in which you can rise up the ranks. It is also important to recognise that with each promotion, you should be getting a rise in pay. Now here is the thing that most people simply do not consider: much of a pay-rise? You will find that in offices and schools all over the country people take on new responsibility at work for what amounts to a token gesture more a badge of honour than a pay-rise. People convince themselves that they are doing it more for the experience! However, in other offices and schools, people are doing the same jobs for much more money. The reason for this is simple the Top Earner is on a great salary. If the top man or woman has a very healthy salary, there is more scope for those under that boss to be paid well. If your boss earns £60,000 and his or her second in command earns £50,000 why should you be offered much more than £40,000 for simply running a department? Instead, apply to run a department at another firm where the boss is on £150,000 and you should find that your salary has risen in the same way. take on the post of responsibility -load. All it will do is drain your time and patience, for little financial reward. There are better ways of using that spare time to make money (more of that later) instead of investing time in a company that will not invest its cash in you. 9 Please turn over...
Secret Number 5 All over the developed world there are people who are in the rat race, and It may well pay them handsomely, but it gives them no joy. This is a sure-fire way to eat at your wealth. People who hate their day-jobs end up spending all their money trying to find ways of improving their lives and bringing some joy back in to an otherwise dull and frustrating existence. This will ultimately leave nothing left for the time it is most needed that is, when the job finally stops at retirement and you are able to enjoy it. At this point, your lifestyle would have to change because there are no funds left. The job has taken all the best years away from you. The best thing is to find a job you love and then you will be paid every day for doing something you actually enjoy. In fact, it could be said that you never actually work at all! 10
Secret Number 6 Many people who strive to be wealthy have little understanding of the value of time. They work all the hours under the sun in order to gain just a few more pounds on the pay slip each month. However, they have neglected to notice one important fact. They are not finding the time to enjoy their income. In fact, they have no time to enjoy their income because of the hours they are working! You know you are truly wealthy when you have the ability to control your time and use it as you see fit. You are only wealthy if you are able to spend your time doing the things you really love doing. It may well be that you do really love your job, and that is absolutely fine. The key thing is to be able to have the freedom to do it when you want to and not do it when you the confidence that you will be able to continue to live in your current house and with your current life-style. You need to be able to enjoy the same holidays and eat the same kinds of foods. If there is a need to cut-back and tighten the belt immediately, this will mean that your free time is not as enjoyable as it could be. Sadly, this is the situation most retired people find themselves in. Despite working hard all their lives, their pension and investments simply do not provide them with the lifestyle they had dreamed of. Right now, then, you need to work smarter. Enjoy your life whilst you can. Value your time. Make your income work for you, rather than simply working for your income. 11 Please turn over...
Secret Number 7 the new Gone are the days of needing a trade in order to support yourself. Gone are the days of the protestant work ethic, in which we are told to feel Because of the internet, ideas and products can be presented and marketed by every man woman and child on the planet (well-almost). And yet, people still fall into the age-old trap of assuming that the only way to live is to give up all their energy and time to a company in exchange for being paid at the end of the month. What you need to do, whilst doing your day-job, is to experiment on finding your own marketable product. It could be something you make and sell. It could be a service you offer. It could be something you buy and sell on for a profit. Or, it could simply be the smart use of the pay y You get your pay each month what do you do with it then? go back to my advice on how to free up some additional income. What is left over will be enough for you to start a business. Yes, I am absolutely serious. You can start a business on the internet for as little as £5.00 a year it just takes the setting up of a website, and of course a product. Now that is where you use your time and energy. Be creative. What would YOU buy? What would your friends buy? What do YOU know that others would be interested in? Which service would YOU pay for? Give it a try. You only need to make a small amount of money to have more than you have now. Once you have that small amount of money coming in, you can put it to good use by investing it. Money is like a seed. It will only grow if you plant it wisely. 12
Secret Number 8 Building wealth takes time. You may make small amounts relatively quickly, but using these amounts to make the serious money is where the The way to lose money quickly is to invest from money you cannot afford to lose. There are always losses in investing and if you invest money you cannot afford to lose and subsequently lose it, so begins a downward spiral of loss chasing. This is an emotional roller-coaster which eats away at funds. Each new investment becomes more risky as an attempt to recoup the previous losses, and wherever emotion is involved in investing there is likely to be disaster. All investment portfolios need to have a spread of different types of . This way, if one area (manufacturing, for example) is hit hard and drops in the market, your bounce to compensate. I will show you how to create such a portfolio later. However, on each and every day, the markets move up and down. Three out of four stocks will follow the direction of the market in the long term. This means that if there is a big reason for the market to take a tumble, the chances are your portfolio will also drop down. This is no use if you were hoping to use some of this money to pay your weekly shopping and food bills or mortgage. You should be aware too of what is called the BID/OFFER spread (or BID/ASK). This is essentially the difference between the asking price that you have to pay to buy a share and the selling price that you will get if you sell. At any fixed point, the selling price is always less than the buying price. For this reason, as soon as you purchase some shares (and assuming the price stays the same for a while) you will have lost money. Factor in the stamp duty (Tax) you have to pay on your purchase and the commission you have to pay your broker for carrying out the deal and you will have lost even more on the deal. In fact, the price of the shares will have to rise considerably, just for you to break even. As soon as you sell the shares you will have to pay a commission charge and potentially some capital gains tax too, so to really make money the rise has to have been worthwhile. 13 Please turn over...
Trading too frequently (a temptation if you are desperate for the money) is a sure-fire way to see your gains eaten up in bid/offer spread and commission losses. With this in mind, you should see that you simply cannot expect to make money easily and quickly and it is therefore beyond stupid to invest money that you need for other purposes like paying bills. Only invest what you are prepared to lose This is a psychological state of mind, but a very important one. Emotion has no place in investing. Nobody is happy to see money go down the drain. However, with investing, you simply have to be prepared to see it course, is to win more than you lose, so that in the long term your portfolio grows and your net wealth increases. It is simply a fact that you will have to take some losses along the way. So is it worth it? Yes. The growth of money is exponential. By that, I mean that it grows at a faster rate as the size of the sum increases. This is because of the beauty of compounding. Earning a 10% return on £10,000 is only going to get you £1,000 before tax. However, 10% return on a £1,000,000 portfolio is £100,000. This is naturally far more impressive, despite needing no more effort or work on your part. Once this return is compounded every year, the larger sum will grow at a considerably faster rate. With compounding (assuming just a 10% return per year), even £10,000 can turn into £44,402 over 15 years! 14
Secret Number 9 Get a good broker There are countless good brokers out there who can purchase and sell your stock for you. They offer many different levels of service and you need to decide what it is you want and need. You can get a fully managed portfolio whereby you pay your broker a fee and a percentage of your gains. They will discuss with you and advise any major decisions to buy or sell and will then make the transactions for you. This kind of service can be useful for people who do not want to make the effort of getting their feet wet and doing the research themselves. It tends to be for the more risk averse people. The problem with such a scheme of course is the additional cost of the brokerage and the loss of money in commission. You can also go to brokers who will let you make all the decisions, and will simply act as executors of your decisions. They will charge you a flat fee per trade. Some will charge a quarterly or even monthly fee for the privilege of having the account and there will often be an additional fee - meaning that you have not made enough trades in the month. These brokers can act by telephone and many now have platforms where you can do it all yourself on-line. Personally, I recommend the newest breed of broker the online investment platform. There are some great deals out there and depending on your trading frequency, you can get considerably lower execution fees than with traditional telephone brokers. Some do not charge for the account or have any inactivity fees. The best will have a portfolio manager section on the website which enables you to see all your stock holdings, and their current position in terms of price, profit and loss. You can action buys and sells in real time, or as regular subscriptions. You can choose to purchase (or sell) a set number of shares, or a set cash value. I like to use the Interactive Investor platform (www.iii.co.uk) and I tell you that without prejudice or any commission. As I said, there may be better deals out there for you at any given stage, so do shop around. 15 Please turn over...
Secret Number 10 Most people know very little about their tax entitlements, possible reliefs, and the ways in which some of their money can be allowed to grow tax free. to have my bins emptied, the roads mended, emergency services and the like provided. I should pay my fair share. I even believe the wealthy should pay more than those in relative poverty. That is only fair. But the key thing here is that I should pay my FAIR share. I should not pay more than that simply because I am unaware of the rules. The wealthy know all about how to play the system to their advantage. They are not cheating (well not the decent upright ones). They are doing nothing illegal. It is simply that they are better informed. So your first task is to investigate whether you are paying more in tax than you should. You can do this in one of two ways. The easiest is to book a tax accountant to come round and go through all your paperwork and advise you. This will cost, however, an ly. The other route is to go online to the government website for the Inland Revenue and read all the help guides. Take your time. It is inertia that prevents people doing this, and they end up paying thousands of pounds more than they should every single year. Many do this for their whole working career and never know about it. The second thing is to make sure that you use your ISA allowance for saving and investing. ISAs are tax free wrappers for your money. Any capital gain inside the ISA wrapper is tax free. Any dividends paid as income inside an ISA wrapper are (reduced tax) and income tax is not charged. A little bit of advice on investing tax-efficiently from an Independent Financial Advisor will go a long way. -wealth grows at a faster rate, because you are not constantly giving it away again in particular, you are not giving MORE than your fair share. 16
Secret Number 11 makers not flashy pipe- Too many people are wooed by the latest technological advance and assume that because it is new it must be set to make millions. Well, just occasionally, they are right. However, very often these technological ideas fail. -need or want and therefore do not have. If you invest in the company that makes these things, your portfolio is likely to go down-hill fast. Instead, you need to think about true-value. What do people really need? Yes, the technology to listen to different music in every room in the house all controlled from your phone sounds like a great idea and it may sell most recession proof companies in the UK. It has achieved year on year profits despite not being a trendy company with any new technology. And what about refuse processing companies? These are very un-trendy but are absolutely necessary and will ride out a recession happily. Again I say keep emotion out of your investment decisions. Go for the investment that is going to give you the best return on your money. Ask yourself, is the product essential? Is the demand rock solid? Is the need for this product going to continue? Is the company going to pay the shareholders well? right track. Of course, it is worth taking a punt occasionally on a few new and trendy companies hoping to create a new market. The returns can be phenomenal when they come off. However, you must remember what I said about a diversified portfolio. There should be a predominance of regular companies in necessary sectors even if they are boring. You will be interested to know that if you look at the careers of people who can afford to send their children to independent education you are are the children of a doctor. You are certainly more likely to find the children of builders and plumbers than you are the children of cutting edge technology developers. 17 Please turn over...
Secret Number 12 Not all investments are the same. Some are the kind that will grow (hopefully rapidly) in terms of their capital value. Others are the kind that are fairly static in terms of capital value, but pay a dividend (an income per share). You should invest in different types of company and in different markets For example: A Mining company and an Oil company A Telecommunications company Something in the Financial Services area like Insurance A Biotech company (like a drug manufacturer) You should also look to diversify in terms of growth and income. The balance of this depends on your time of life. What I mean is - if you are young you should favour growth. If you are nearing retirement you should aim for income. The companies that are likely to have the greatest growth are usually the most risky in terms of the possible loss of the investment. For example, if you invest in a speculative oil company you have two outcomes. Either they will strike oil and your investment will go through the roof, or they won t and it will gradually dwindle away to nothing until the company runs out of money and goes bust. Always edge of the seat stuff! It is foolish to have all your money in such companies, of course. On the other hand, there are companies which over ten years may not really change much in terms of their capital value. This means that you are not going to lose on your investment (although nothing is absolutely certain). If you choose wisely, you should be able to pick a company like this which also treats its shareholders well by paying dividends. This is a share of the profits. If you get it right, this kind of investing can be the one which brings you an income for life. 18
Secret Number 13 r It is usually the case that private investors favour the country in which they live in terms of their investment decisions. For some reason, people tend to believe, for example, that because they themselves are British, their money will perform better if invested in British companies. It is as though they think they understand the business better and have some input. This is dangerous thinking though. If all your investments are in one country, then the basic economic performance of that country will influence the growth of your portfolio. Government decisions on interest rates or on corporation tax rules (for example) could have a massive effect on your whole investment, rather than just a part of it. Just as it is important to diversify into different types of stock, it is also important to spread your investments into different countries. You can do this either by going through a broker who allows you to purchase stock in a foreign exchange directly, or by investing in funds which focus in overseas markets. Once this psychological barrier has been crossed, you will find that you are fishing for investments in the ocean rather than a small lake. There are far more opportunities to find some bigger fish! 19 Please turn over...
Secret Number 14 for income This secret is dynamite. What many investors are simply not aware of is that investing for income can actually also lead to capital growth in two different ways, as I will explain. Therefore, it is actually a very sensible idea to invest for income almost entirely, and leave only a small amount of your portfolio for speculative growth. Time and time again, this has been shown to provide a lower risk investment, which actually grown in the longer term. You will not have the white-knuckle ride or the overnight riches. But nor will you have the obvious and real danger of losing the lot! You will have the possibility of financial freedom and true wealth that you dream of. How can these companies grow? Well putting it bluntly, companies that are able to spend some of their profits on the share-holders are by and large the companies that are doing well enough to have no financial worries. This means that they are generally safer bets. This means that over the long term, they will grow at least in line with the stock-market (an average of 12 13%) and often better. In addition to this, you have the dividend payments and using them wisely will make you even more money. Dividend Paying Stocks You need to check what is called the Dividend Yield of a stock. Generally, if it is paying upwards of 4%, this is considered good. If you can get over 6% this is considered excellent. However, some companies seem to pay out exceptional dividends (at about 12%) but on closer inspection this is seen to be unsustainable for the growth of the business. The best companies will only give 40-50% of the profit back to shareholders in dividends. The rest is reinvested into the company to ensure growth. Companies which give much higher dividends are in danger of being excellent payers for a few years and then either going bust or having to stop the dividend altogether. Neither of these is good for an investor. 20
Remember I spoke of how compounding interest gives ever increasing Imagine you own 1000 shares in a company, and for the sake of ease, the share price is £1.00. That company pays you 10 pence per share as a dividend. Obviously, you would earn £100.00 from this dividend issue. Now you have a choice, you can spend that money on a treat, rather like an unexpected bonus (choice 1). Or, you can reinvest the dividends now. Assuming the share price is still £1.00 (it may not be, of course). At the next dividend payment (still at 10p per share) there is an obvious difference depending on whether you took choice 1 or 2. Choice 1 would mean you still had 1000 shares and would be paid a dividend of £100 again. Choice 2 would mean that you now have 1100 shares and would be paid £110. If this cycle were repeated exactly again, choice 1 would have received £300 in total. Choice 2, with dividend reinvestment would have received £321. With each new reinvestment of the dividend, the growth of the next payout becomes larger. Growth is exponential. Now, I have not factored in dealing costs or stamp duty. Neither have I factored in the rising and falling dividend payments. Neither have I taken into account a rising and falling share-price. Nevertheless, even with all this taken into account, the brute fact remains dividend reinvestment will make a portfolio grow exponentially, whereas taking the dividend as a cash withdrawal will leave it on capital growth alone. offered by your broker). This will automatically purchase more stock with the dividend payment, and commission will be much reduced in comparison with organising a separate trade yourself. 21 Please turn over...
There are other important things to remember regarding dividends. Declaration date: The declaration date is the day the Board of that they will pay a dividend. Once this has been done, the company now must pay that money to the stockholders. At this point, the Board will also announce a date of record and a payment date. It is usually about the same time each year, but there are fluctuations Date of record: This date is usually - This is the day on which the company checks its record of shareholders and sees who need to be paid a dividend. If you bought shares after the ex- dividend date, you would not be entitled to the next dividend payment. In fact, the investor who sold you those shares would, despite no longer being a holder! This is the dividend trap. Buying a dividend paying stock once it has gone ex-dividend means that you actually miss out on that dividend (although you do get any subsequent dividends if they are paid and you are holding at the next date of record). Payment date: This is the date the dividend will actually be given to the shareholders of company. Some dividends are paid four times a year on a quarterly basis. Others companies pay dividends only on an annual basis. Tax on Dividends The best place to invest in dividend paying stocks is, as I said earlier, inside an ISA. If you are a basic rate tax payer in the UK, you pay a low rate of tax on your dividends which is taken as a tax credit before you receive the dividend. If you are a higher rate tax payer, you would normally pay above 32% (at current rates) on dividend income and then get back the 10% tax credit, but inside the ISA although losing the 10% tax credit you will not pay any additional tax. In addition, any capital gain on your investment inside your ISA is capital gains tax free. Very beneficial to your investment! 22
Bonds There are many types of bonds that you can buy. Unlike a share, you you have loaned money to it (or the government). Basically, a bond is an investment that promises to pay a certain level of interest if the investment is held for a set period. There are variations, of course, and some will promise to pay a set amount only if a few conditions in the market are met. This means that some bonds are higher yielding in interest than others, but are also higher risk. You should also remember that your capital is tied up in the bond for the set period of time. You either cannot withdraw it at all, or will lose all the accrued interest if you cash it in early. It is best not to tie up money for more than 5 years in a bond. Interest rates can fluctuate a great deal in this time and it is impossible to know now whether the bond will still be the best place for your money in five years time. In terms of how many bonds or bond funds to invest in you should typically stick to the rule that the percentage of your portfolio in this type of investment should equal your age. For example, a 40 year old ought to have around 40% of their portfolio in bonds. Any more than this will hamper the potential growth of the portfolio and any less will probably mean that the portfolio is too risk orientated. You will see that as you get older, the risk level needs to drop to guarantee income and capital growth is less important. Property Investing in property can be done in several ways. The most obvious (although costly to start up) is to purchase the property directly. Once being the rightful owner of a property (even with a mortgage) it is possible to let it and take a rental income. This has the advantage of helping to pay off the mortgage (if a repayment mortgage deal is taken) and then eventually being an income for doing next to nothing each month. In addition, there is likely to be a rise in the capital value of the property, which can be released at a future date. This cannot be put inside an ISA, of course, so is subject to capital gains and income tax. 23 Please turn over...
The second approach is to purchase shares in a property based fund. This is essentially the same thing, as you then get a share of the capital gain in the properties the fund owns, and a share in the income of those properties that are let. This kind of fund can be wrapped in an ISA. This is a cheaper way of investing in property, but unlike the first, you do not actually own the property itself. For this reason, if the value of property falls dramatically, the investment can become almost worthless, whereas in the first case, the House (or commercial building) can still actually be used by the owner. It therefore has a practical value and is also inflation busting. What this means is that as inflation erodes the value of the currency, the property itself still exists. This is why some people have mortgages which were once difficult to afford each month, but now many years later cost them less per year than having their daily newspaper delivered! The danger with investing in property is that there are additional costs, such as legal costs, void periods when the property is empty, refurbishment costs and the like which do not occur in stock market investing. In addition, over the long term, the stock market has always out-performed the property market. However, having some property is essential in a diversified portfolio and when in the right area can bring in a good and regular income. 24
Secret Number 15 Understand how to recover from l The stock market can be an unfriendly place. There are days when hundreds or even thousands of points are wiped off the value of shares in one day - the famous and the thing you need to know is that it is almost impossible to predict. Equally, it is almost impossible as a private investor to do anything about it. When trying to sell out to limit losses, you find that your broker simply cannot get you a price, and yet at the same time you can see the price falling. It is, as I said, a frightening place to be. However, if you follow the secrets I have given you so far, you should be protected against some of this. A diversified portfolio will help. Investing in good dividend paying stocks will also help, as these tend to be It must be expected, however, that there will be losses. They may not be as dramatic as a complete stock market crash but nevertheless, you may wake up one day to find a large percentage fall on your portfolio. Thank fully, whilst it is certainly not a comfortable place to be, and whilst what I am about to tell you seems counter intuitive, there is a stack of research and experience which will back up the fact that it works. The basic trick here is to purchase more of the same stocks, even as they continue to fall. I will say that again as the price goes down, buy more of the shares. There is a psychological state of mind you need to get into. If you believed the stock was worth purchasing at, for example, £4.00 a share. And then the price slides down to £3.05. You need to ask yourself a make it worth less, falling, then what you are now seeing is that the price of your share is now at even better value than on your first purchase. It therefore stands to reason that you ought to be buying more at such a bargain price! If the price falls again, you should then buy more for the same reason. Now many people will point out to you that it can sometimes take years for a stock market (or even an individual sector or share) to get back to are simply completely wrong. 25 Please turn over...
As the markets recover even if it is 10 years later, the value of your investment is now going to be considerably more than it was when you first bought in at that level. In fact, if you have consistently and regularly invested into the stock during that low period, then when the bounce back considerable margin. This price of your share purchases. You will be able to see outstanding growth I have already mentioned dividend reinvestment. This is particularly important during a bear market. Consistent dividend reinvestment will also average down a share price purchase level and the bounce back will again be all the more profitable. out of investing, you are likely to have more success. Investors (particularly inexperienced ones) are likely to either attempt to sell a stock and take a loss (sometimes a huge loss) or to simply hold. As I have shown, neither of these is a good recovery plan. An Example Imagine you bought 105 shares of a dividend paying company. You paid £27.29 per share and the total cost including commission and stamp duty was £2,900. Thanks to reinvested dividends, in four years you would own perhaps 124 shares, almost 20 shares more than you started with. If we imagine that the market is a bear market, and the stock has crashed (along with everything else) to £23.62 - despite a drop of 13% in the price you would actually show a slight gain on the investment. In bear markets, where 50% losses are not uncommon, you will agree that this is pretty impressive. Also, the dividends would continue to be reinvested buying more shares as the stock price falls. Here comes the best bit: Imagine that now the price begins to get bullish and the stock gradually rises up to previous levels. Well, if it were to reach your original purchase price, you would now be showing a gain of nearly 18.5%! Naturally, this will only work if the company is robust and does not go under in the falling market. This emphasises again the importance of choosing decent dividend paying companies who are likely to be around a long time! 26
Secret Number 16 Avoid Investment/Trading Seminar Scams We all want to be better investors. There is always the dream that out there somewhere is the system which allows you to pick perfect stocks and perfect funds every time. We would love to have insider information which would enable us to time the markets perfectly, jumping in at the start of a bull market and out at the top of a bear market. It is this desire which is then exploited by others, who claim to be able to give you the skills you need to become stock-market millionaires in next to no time and with no understanding necessary. Unfortunately, these people are skilful scammers. They have the funds to produce glossy leaflets and book top London conference centres to add to their appeal. They are able to offer free meals with their conferences, and even free conferences. However, the cost of buying into their schemes could be enough to set your investment profile back by several years and in some cases, it can lead to financial ruin. In addition, it can be very difficult to avoid buying in as the sales pitch is extremely persuasive. Remember these guys are pros. ALWAYS RESEARCH THE COMPANY OFFERING THE SEMINAR There are some alarms that you should listen out for when investigating such schemes. 1. Does it require a big up-front payment? The dodgiest scams demand a large up-front payment as this enables them to cover all their costs and then some. They can also be long gone and have disappeared completely (call centres and everything) when their recent victims try to return the schemes or ring for support when work. 2. . Remember my mantra there is always risk and you should never invest what you cannot afford to lose. When these guys try to sell you the pot of gold that will pay out in-perpetuity and never lose, you should get out of there. When pros and they can disappear into thin air. 3. This irritates me beyond belief. I have seen systems advertised which claim they will only take 200 people on to ensure that they can provide good customer service. In fact, they are taking 200 every day that week and every week and providing nothing at all. Always take your time. 27 Please turn over...
4. Whatever people tell you, it is highly unlikely that you will miss the boat on a share or scheme. There is always fluctuation up and down in prices and steady rises take years of up and down movements (just look at some charts) in most cases. Taking a week to think about it could well save you your whole investment pot. 5. - Scammers love to say such things as the average punter who is seeking their golden ticket to financial freedom is less savvy about such things. Off-shore investing and hidden markets in China or Brazil are often used as a way to make it all seem plausible. They may even tell you they spend half the year out there getting to know the way things work love to tell you that investing overseas means you can avoid paying tax (which is not true). 6. If this were the case they would offer the whole lot for free with no charge EVER. These guys make money by selling the system only. They probably never trade at all. Do some internet research on them, Find some bulletin boards dedicated to discussing investment systems and investment scams. Ask a few questions. Have others been stung or are these people legitimate? Again TAKE YOUR TIME. 28
Secret Number 17 At the moment, I am hearing advice to invest only in funds, and to pick the best fund managers irrespective of the area in which they are investing, as statistically they will out-perform the market. I am also hearing advice to ignore funds as the commission paid to the fund manager will kill your profits. Instead, people are advised to attempt to mirror the fund managers or pick the stocks themselves. I am hearing advice that the only safe way to make money on the markets at the moment is to stay out of them altogether, and instead to betting which way the markets will go. This enables a win from a rising and falling market. I am also hearing advice that spread betting is a dangerous game likely to bring some hefty losses of more than the original stake. I hear advice that the way to go is to stick to penny shares on the alternative investment markets, as this is where the big growth potential is. I also hear that people should avoid the risky penny shares and stick So which way is a private investor supposed to go? Well the answer will take you back to Secret Number 12. Diversify. You should have some funds. Leave these to boil over the long term. Subscribe to them regularly. Treat them as your buy and hold investments. You should also have a diversified range of other stocks. Some of these you will treat in the same way as your funds, with reinvested dividends and regular subscriptions. Others, you may trade more frequently even taking advantage of some large swings in the price occasionally by buying in and out on the same day or several times a week. You should have some high-octane and risky penny shares. You may lose the lot, but you may have a massive growth in share price. You should also make sure that there are some defensive stocks the dividend payers who remain fairly static in the market. And yes, you may engage in some spread betting of the markets as this may be a very lucrative thing to do, whatever the market is doing providing you engage in some careful money management and that you minimise your risk with stop losses. This takes you back to my mantra again. 29 Please turn over...
Secret Number 18 Many private investors read the bulletin boards and press releases about various companies. They subscribe to tipping services which will advise about what a company is about to do, or the new breakthrough they are soon to launch. The mistake they make at this point is assuming that somehow as a result of the news the share-price will go higher from that point and therefore buying in. In fact, it is usually the case that when there is good news from a company, the share-price rises a little for a short period and then falls rapidly for a longer period. This leaves the new private investor with a loss on their recently bought share. Why does it happen? Well all this information is in the public domain. If you have heard about the share tip or the news (or even the likelihood of good news) so will others. Pro-traders will certainly have heard about it. The share price you are seeing is in fact one which has anticipated the news already. Any spike after this is where inexperienced private investors are buying in. Once this spike has happened, the pro-traders all sell either all or most of their investment in large volumes, causing the price to drop like a stone. Once it is low down, they buy in again perhaps, or they may go to another share which is also expecting news and repeat the action there. Unfortunately, this causes the poor private investor to own shares which they bought at the top of the spike. Worse than this, some will panic and sell out as the share drops, taking a loss along the way. Thankfully, because of Secret Number 15, you know what to do in this scenario. Simply buy more on the way down. If you have no spare capital immediately available for such an additional investment, never mind. Hold on to it until you do. It will rise again. So, the trick is to understand what it is that drives a share price. Remember the rule of supply and demand. The price goes up as more demand the share. They do this in anticipation of the news. Once the news is out, demand has gone and so they sell again. Please note that technically it is investor sentiment that is driving the price and not the news at all! Investors behave like a herd. Bizarrely, people spend more money investing as a share price rises, and then sell again as it is falling. It is all about greed and fear. Try to remove your emotional response and 30
Secret Number 19 Understand the Jargon and Charts with both feet and then have to learn by their mistakes. Unfortunately, this is a costly way of doing things. It is also the case that inexperienced investors become over-confident in their own ability. Psychologically, it is easy to see a few gains and think that you therefore know what you are doing. This is compounded by the fact that we do not like to think about and dwell on financial losses as they are painful. It is true that a little knowledge goes a long way. It is truer, however, that a lot of knowledge goes a long way. Understanding some of the fundamentals of investing (that you do now because of this guide) will be some of the jargon and having a rudimentary understanding of chart technical analysis. You can study for weeks and weeks and still be only scratching the surface of technical analysis (TA). However, some basic understanding of charts is quick to gain. I would say that you need to understand the fact that the direction and trend of the price is shown by the chart, and the volume of shares purchased is also shown. The higher the volume on any rise or fall, the more momentum there is behind the move. Basic indicators should also be known. Simple moving averages (usually the 20, 50 and 200 day) can be used to see where the current price is in relation to its average over time. If the price crosses a moving average with any momentum, this is often a signal that the direction of the price has turned for more than a short term. Using Google to sear and reading around a bit will also give you a good grounding in some of the more complex aspects of TA. Again, knowing these in a rudimentary way will actually put you miles ahead of most private investors who know only that the price is going up or down. Spend some time searching the meanings of investment jargon in order that you can engage fully in what advisors are saying. It is no use thinking that it is time to buy in a bear market or when people are 31 Please turn over...
Secret Number 20 -estimate your life- Life-expectancy is only going one way and that is up. Enforced retirement age in Europe has just been dropped as it is clear that people are living longer and longer and are obviously still capable of working much older than before. When planning your investments, it is important to recognise that your retirement is going to last a long time and that there is a high probability you will need to have money to live off for longer than even you imagine. Medical breakthroughs are happening all the time. Our understanding of the need for exercise and a healthy diet has increased or life span hugely. Standards of living are considerably improved, but in our old age we will need the necessary funds to keep us in the comfort we desire. Secret Number 21 Saving money and investing money are different things. With investment there is always a risk. You will read over and over again that the value of your portfolio can go down as well as up. In fact, as I have explained, in essential to remember that some money needs to be saved in very low risk ordinary bank savings deposit accounts. This will be there for a rainy day (or a much needed holiday), and may enable you to siphon off some of it occasionally to invest, but you should aim for a certain amount to be saved in this type of account each month. As a general rule, and this is not always easy, you should aim to save enough to cover your mortgage and any other regular bills for a few months if you suddenly found yourself out of work. This gives you a couple of months grace to get yourself sorted out. You cannot rely on investments to do that as the volatility in value and the illiquid nature of the money (relatively inaccessible) is too great. You should always shop around for savings accounts. Banks rely on competitor because it is easier to keep things all under one roof. They hope tcustomers. BE DEMANDING! Ask for the better deal or you will take all your accounts elsewhere. They need your business and will actually bend over backwards to keep you on their books. 32
Secret Number 22 Enjoy without addiction Once you start investing, you will find that it becomes extremely tempting to watch your investments going up and down all day every day. In fact, you can spend hours doing it. This is counter-productive. You could find that you have spent three hours watching a £2.50 rise on your portfolio. In terms of the use of your time, this is very poor. You would be better off spending that time stacking shelves in TESCO and it would give you more money to invest! It is important to remember that there are always short term swings in the market. Watching every one of them will not actually serve any - (and have the time to do so), I would advise only a cursory check of your investments each day. This will certainly allow you to top up your shares when they have fallen, but will not take so much time that it becomes a very poor hourly rate. Remember also to have a clear strategy as to how much you are prepared to risk each month. Secret 8 was to only invest from your surplus. Too much portfolio watching can encourage you to invest beyond this amount as the temptation to buy new shares or top-up others is very strong. tional trading is always safer in the long run. 33 Please turn over...
Secret Number 23 All Bulletin Boards are positive If you join an online investing community, you will see that each share has a group of investors who will watch the price rise and fall and regularly comment. Some are very experienced investors and others are very new to this game. The key thing to know is that the comments will be almost entirely positive. People who comment on share bulletin boards are almost without exception holders of that share. -talk down a share as it will potentially damage their own investment. In fact, if people do post negative information or views about the share, these posts are often met with hostility and derision. This has the effect of making such posters tread carefully before considering giving any balance to the views on the board. As a source of information about a particular investment, the bulletin boards can be very useful. Private investors are often very good at doing research into the fundamentals of a company. However, you need to be aware that negative comments will be few and far between and that almost every share will be portrayed as the share pick of the decade! Using bulletin boards to make a decision on whether or not to invest is a dangerous game. The information presented should be only part of what you take into consideration. Remember also that all this information is in the public domain and was known by the pro-traders long ago. 34
Secret Number 24 Aim for multiple income streams A poll of wealthy people would very quickly show that most of them made their money in more than one way. I have already mentioned that income is not wealth. However, this is particularly the case if your income comes entirely from one source. What do I mean? Well, if you have a good job which pays a very healthy salary but that job stops, your income will stop too. You will be left only with what you have managed to put by in the form of investments. However, if you have managed to build up a group of income providers alongside your regular job and investments, then your income will be able to continue for longer without the regular salary. What kind of income providers? I have already explained about investing for income. This is a good place to start. However, you should investigate the possibility of generating other income on the side. There are plenty of part time and flexible working opportunities where you can make a small amount of cash for a small amount of time. Some of the best are the multi-level marketing schemes. Providing the company is a sound one (like Telecom Plus PLC), these can generate a reasonable (or outstanding) income which goes on paying long after the initial work was done. The other area in which to look is the service industry. Can you set up a unwanted jobs? Cleaning Homes, Washing Cars, Washing Windows, Doing Ironing the list is endless. The secret, however, is for you to act as a manager who sets up the deals and employs others to do the hard graft. This way, you get the profits only needing to do a minimal amount of work each week or month. You can expand the business as much or as little as you wish depending on your free time. The beauty of such an opportunity is that once it is rolling it takes very little time to generate the income. Naturally there are some start-up costs and effort, but beyond that not much. Finally you could consider writing a guide on something you love and selling it! 35 Please turn over...
Secret Number 25 You never know enough It is always important to remember the value of education. We all continue to learn throughout life, but some will be more active in that learning than others. I am not suggesting that you should go out and do a higher degree (although you may, and it could be the best thing you ever did). What I am saying is that when dealing with the challenges that life brings your way and particularly when attempting to move into new areas out of your comfort zone, there is no substitute for education. There are countless books, for example, on technical analysis of charts. It is worth reading some of these. There are weekly eNewsletters you can sign up to which will let you know what is going on in the markets and give analytical comment from experts. There are websites with discussions between opposing views. All of these things you should digest. However, reading the manuals is not enough. You would not expect to be able to win the world snooker tournament simply by reading a manual about how to hold the cue and strike the ball. Nor would you expect to be able to play the violin by reading about the techniques. There is no substitute for practice and exposure to that which you are trying to learn. Many brokers allow you to open virtual trading accounts and you can -before hurting your finances. It also enables you to put into practice what you have learned in theory. This part of learning is invaluable. Once you have got the hang of what you are doing and you are familiar with the trading platform you have chosen to use, you can venture into the real account and put some real money in. Jumping in with both feet without any knowledge or practice is rarely a good thing to do. Remember, there is always time to learn something new. 36