The Key to Success

I bet you all remember the really smart kid at your school when you were growing, the one who was “destined” for great things in life. Well, I bet you twenty years later that the most successful person in the class is not that smart kid but the person who took action, a few risks and was bold.

If you want to reach financial independence, yes you need to build up your financial knowledge, understand different asset classes, understand tax laws and get yourself in the right mindset…but all of this information which makes you knowledgeable is only worthwhile if you take action with this information. That statement is so important I will repeat it again, a person will only be successful if they take action based on the knowledge they have developed. That action could be buying your first rental property, having the confidence to go into a shop and buy your first gold or silver coin, or buying your first share.

Yes, the action may feel intimidating at the time. It may feel as though you are risking a lot and there is a big downside…but if you have done your research and reading, consulted suitable mentors then the chances are that everything will work out. If you’ve been bold and taken action and things haven’t worked out, then dust yourself down and try again with the new knowledge you now have! This is the way things have to be, playing it safe will not get you to financial independence.

The magic ingredient in all of this is finding the trigger that will stick that rocket up your backside and get you taking action now. That rocket has to be something which comes from you. One way I have found to do this, and sorry for sounding depressing, but it really works, is to think about how you want to be remembered. What would be written on your gravestone…do you want to be remembered as a success, someone who lived with no regrets, was able to fulfil all his dreams…if so live with passion, take action and a few risks along the way and I’m sure you will reach financial indendence sooner than you think.

Just remember, life is finite, seize the moment, carpe diem…most importantly take action. Fortune favours the brave and financial freedom will find the action takers! Get off that fence and make some decisions.

A Warning on Stock Investment

We all rely heavily on the stock market with a significant chunk of our wealth reliant on it, particularly through our pension.

Pension Scheme Dangers

What typically happens is we go through our working lives making monthly contributions into our pension (defined contribution plan) in the crazy and naive hope that miraculously the market will keep on rising and we can enjoy annual average investment yields of 8 or 9%. Welcome to the real world everyone, in reality this doesn’t happen! What does happen is we have periods when markets will lose you money and long periods when you will make money. How these patterns are determined is whether you buy-in when the markets are under or over-valued.

Beware- Overvalued Stock Markets

At the moment, based on a number of indicators markets are most definately over-valued! So what does that mean for our annual average returns over the coming 10 or 20 years…well they are unlikely to be very good and will result in a disappointing retirement pot. This knowledge has come from a fascinating book I have just been reading called “Unexpected Returns” by Ed Easterling.

Please follow this link to an amazing chart which shows a matrix of annual stock market returns since 1900 over whatever holding period you choose. Please study the matrix, it reveals some fascinating insights. In particular, if you invest into overvalued markets (ie. when price to earnings ratios are above 20), it shows how long you will have to hold your stocks for before you will a achieve a decent positive return. For example, if you invested in the early 1930′s you would need to have held that investment for 20 years to see a positive average return, scary! We now appear to be in an environment when price to earning ratios are very high, it may well take at least ten years to enjoy a decent return.

Now, all of this is not to say that stock market investing is a bad idea, it is just important to buy-in when markets are undervalued, therefore giving yourself a high chance of achieving a decent return over a 10 or 20 year period. At the moment some European markets look cheap, especially Italy, Spain and Germany where worries about the Eurozone may have been over done. In fact, I was reading that at the moment these markets have not been this cheap compared to US equities since the 1970′s! Other markets worth investigating would be my old favourite Japan, but avoid the US!

The importance of multiple streams of income

As someone who is aiming to reach financial independence within the next five years it is important to think about holding assets which provide multiple streams of income. Remember in the words of Robert Kiyosaki an asset is something which puts money in your pocket!

Finding and Maintaining Financial Independence

The game we are all trying to play is to build up our wealth (ie. assets) such that the cashflows produced from our wealth exceed our living expenses plus a bit for having fun! If this is achieved we are financially free. However, it is also important to structure our assets such that should things go wrong we will still be financially free and don’t need to resort to returning to the rat race! How do we go about doing this?…well we need to diversify our asset holdings.

As a example consider the following situation: I find that I need to hold £1m of assets in order to cover by £40k of annual living expenses. If using my assets I purchased a large and expensive property in central London and rented this out to a family which turned over £40k per annum in positive cashflow I would classify myself financially free but I would still be only one rental void away from returning to the rat race. Alternatively, I could hold a series of flats and properties all around the country which aggregated up to a £40k per annum positive cashflow. In this latter case I would have more security in terms of rental voids, geographical economic differences and regional price variations. Effectively, my portfolio would be better diversified…you get the picture!

A Cashflow Pyramid

So we know that diversification is good, but if we want to build a “cashflow pyramid” with a solid base we need to derive cashflow from multiple asset classes too. The following list gives you some ideas for ways of deriving cashflow:

  1. Rental Income from property
  2. Dividends from shares
  3. Advertising and sales commissions from a website
  4. Owning a profitable business
  5. Interest from bank savings
  6. Spread betting on the financial markets

As always though, the less involvement in deriving the income stream the closer we can say we are to true financial independence. This is why it is important as a business owner to have a hands of approach so you can leave the management of the business to your employees and focus on enjoying the profits!

Trading for Profit

I am excited. I recently attended a one day trading workshop in London which provided me with a strategy for spread-betting on the Dow Jones, Gold, and the USD: GBP FX market.

It relies on Tramlines, Fibonacci retracements and Elliot Waves. Now, these may all sound very complicated terms but they are in fact very simple. Please google them if you would like to learn a bit more.

It will take some down to hone my skills but I am prepared to invest the time. I have been doing some maths and I think it will serve as a way of potentially achieving a 25% quarterly return. This is therefore an excellent way for me to build up my funds prior to investing in cash flowing assets to provide my income for financial independence.

Trading and spread-betting is all very new to me but I am about to start putting my first trades on. If I can keep my emotions under control, trade exactly as per my strategy with discipline I’m hoping I will turn a profit.

I will keep you updated as to progress and may even provide insights into some of the trades I have put on.

As ever, I am very happy to try out different investment strategies to get me closer to my goal. If it doesn’t work out, I will be able to cross it off the list and try something different. Experimenting is the way forward and this is the attitude you need to have too if you want to be successful on your path to financial independence.

Asset Allocation for 2013

The investment environment is incredibly difficult to negotiate at the present time.

  • Will all of this money printing result in inflation or deflation?
  • As economies round the world struggle will economies depreciate their currencies to boost exports. Is it a race to the bottom?
  • What is the outlook for stocks. Have we seen major highs for the year or will Bernanke QE3 ( QE infinity) still boost asset prices.
  • What of property? Will the interest rates ever start rising stopping the housing market in its tracks?
  • Will prime London house prices stop increasing? What is driving this seemingly bizarre phenomena going against the grain of the rest of the UK property market?
  • What of precious metals? Will gold hit new highs at some in the next 12 months, consolidate or start to decline?
  • Will China have a hard landing? What will be the impact on commodity prices, exchange rates?

As you can see there is an endless stream of questions which no-one knows the answer too. In this sort of environment it makes sense to hold a reasonably diversified portfolio across asset classes: cash, commodities/ precious metals, stocks and property. A 25% allocation, as suggested by the great Marc Faber, seems reasonable.

One asset class to avoid however is bonds, in particular government bonds. There has been a 20 year bull market in bonds which must be nearing the end. Bond prices have been bid up to crazy levels. It seems crazy that companies are happy to lock up their funds for 4 years investing in government bonds of countries like Germany, Switzerland and the UK for a return less than inflation. It just does not seem logical.

There is a rule of thumb which applies to bonds, that if you hold a bond with a ten year term, a 1% increase in the yield of a bond will result in the bond price reducing by 10%. Just be very careful because you don’t want to be on the wrong side of the market when the sovereign bond market eventually blows up. Check your defined contribution pension schemes as a significant majority of you will be holding some funds in government bonds in your pension funds which you need to exit.

In terms of stocks, look for value. Japanese stocks look cheap at the moment and have done for a while, but the market will turn one day and Japanese stocks will provide you with a great return. Hold some dividend payers, the usual names in the FTSE 100 are BP, British American Tobacco, Shell, Scottish and Southern and within the FTSE 250 there are some great non-life insurers that have been battered down along with the banks but provide awesome dividend yields.

Have a look at some of the gold mining majors. As in the 1970′s when inflation took off, the gold miners went up like they were on steroids. Gold miners are currently cheap versus the price of gold ie. they have not followed the gold price up as strongly. They are slowly catching up but at the moment are still available for reasonable value.

Hold a bit of cash. We do not know whether we will face armageddon in the next year but we know there is a significant chance that stock prices will fall. If this occurs, by holding cash it enables us to pick up any bargains which may arise. Make sure all of this cash is not held in sterling though. It’s easy enough to open Dollar, Swiss Franc, Norwegian Krone accounts for a small monthly fee, right here in the UK.

Sorry, it has been a while since I last posted. I have so much to get down on paper but this serves as a quick introduction to the many questions and thoughts swirling round my mind at the present time.

As ever good luck with building your investment portfolio. Happy investing and good luck on your path to financial independence!


When is gold a sell

I attended an investment conference in London on Friday, one of the key themes was precious metals, in particular gold.

As we all know, gold is in a secular bull market at the moment and the outlook is positive for it whether we get deflation or inflation. Deflation will likely be driven by a lack of available credit in the economy because banks may not want to lend to each other as they wouldn’t be able to afford a loan default. If this climate of fear were to materialise again, gold would be an invaluable store of wealth when the banks couldn’t be trusted to look after your money. Likewise, gold is a hold during inflationary times caused by excessive money printing by Western Economies. The thinking is that gold is not in a bubble yet because it is not heavily owned- the average institutional fund has less than 1% of its holdings in the metal.

The big question remains though, when should we be selling our gold, well…I’ll discuss a few key indicators we can look at:

1. Ratio of the Dow Jones Industrial Index (DJIA) to $ gold price

At the moment this ratio sits around 8. Historically the DJIA:Gold ratio when the gold price has topped is between 1 and 2.  Therefore a reasonable target is 2.

2. Gold and UK Houses

Back in 2005 the average UK house could be purchased using 720 troy ounzes of gold. At the present price of $1,500 this number is 177 ounzes. In the 1980′s when gold last topped out the average house could be purchased for around 50 ounzes. Therefore a reasonable target is 100 ounzes of gold for the average UK house.

3. Bank base rates

At present there is very little opportunity cost of holding gold, since keeping your money in the bank will provide a return less than inflation. Gold will become less attractive once banks start providing a real return on your savings. Another sensible indicator is therefore when interest rates are around the 2/3% mark in real terms.

So this provides some indicators for when is a good time for selling gold, which as you can see are all a long way off!

As an aside I was told about a useful ETF called NYSE:GDXJ, this provides exposure to the top 20 junior gold miners and serves as a simple way of getting access to the junior miners without having to do hours of research on each one. It seems the most efficient way to invest gold is either through the metal itself, bullion and etf’s (LON:PHAU as an example) or through the junior miners. Hope this is useful information.



We are living in extraordinary times

I think it is very important that we remind ourselves from time to time that we are living in extraordinary times. Never before has the Bank of England base rate been as low as it is today. And this exceptionally loose monetary policy is being used in many Western countries.

As you can see from the chart above showing the bank base rate going back to 1694, the previous low was 2%, yet we are currently at 0.5%. This is unprecedented and shows the desperation of the Bank of England to stimulate the economy in what can only be described as a severe financial mess.

The chart clearly shows that the natural level of base rates is around the 5% mark. Normally the base rate is greater than the rate of inflation to encourage prudence and saving but at the moment it is definately not. Historically bank base rates have been around 3.5% above inflation and therefore we can conclude that interest rates, assuming CPI inflation of around 4.5%, should be around the 8% mark!! This would therefore mean that mortgage rates should be 10%, think of the carnage that would be caused if this was the case!

When the Bank of England eventually starts raising the base rate, and they will have to one day, that’s when we will finally see the correction in UK house prices which has been long talked about. And when this correction occurs, that is when some astute investors will pick up some absolute bargains in UK property which will set up them brilliantly for a life of financial independence. I hope I am bold enough to take advantage!

As an aside the gross yield, rent received over price paid for the property, back in the mid 90′s when the property market last bottomed was 9-9.5%. This was in an inflation environment of 1.5% though so the real yield was around the 7.5-8% mark. These days the gross yield is 7.5% but this is on a background of inflation around the 4.5% mark so a real yield of 3%. When real yields get back up to 7.5% mark that will be a reasonable guide to the housing market bottoming out.

Procrastination Will Destroy Your Progress

Anyone who has started on their path to financial independence will soon realise that if they procrastinate their progress will be greatly slowed down. I would go as far as to say if you are a big procrastinator you will be very lucky to reach financial independence!

I have moments of procrastination, the doubts which come into my head when I am making an investment decision- will I be able to buy it cheaper next week? Is this a fair price? Are there better alternatives…similarly there have been moments of procrastination with regard to my financial education- I’ll read that book next week, I’ll research that investment tomorrow…I’ll apply for that real estate course when I have more time. It’s a constant challenge to limit your own procrastination but there are some techniques which you can learn to reduce your procrastination levels, even if you are a massive procrastinator. Some of these include setting yourself goals, having a vision board, and understanding what are triggers that cause you procrastinate and waste time- I have a bit of a problem habit of keeping up with all the latest football news!

Procrastination can also be reduced by financial education. By changing my investment mind set through my reading, I am now a lot less scared about making big decisions because I realise that in order to make progress on my road to financial independence I will make some mistakes. But I treat those mistakes as a learning experience rather as something which I should punish myself for. By all means research your chosen area of investment thoroughly but don’t delay on taking action once you are satisfied with your knowledge.

Ultimately, I think winners are those that take action! Remember even if you have all the financial education in the world, if you don’t put it into practice you will never make any money.

I read a useful book called “The Procrastination Equation” by a guy called Dr Piers Steel who has done extensive research in the field of procrastination . If you think that procrastination could be affecting your ability to reach financial independence please have a look at his book it has useful techniques for combatting it and makes for a valuable read.




Be Your Best

I’m sure most of you have jobs. I myself have a busy job in London which means that I leave the house every morning at 8am and do not return until 7.30pm. At the weekends there are chores to tend too, kids to look after, friends and family to see…so how do you find the time to invest in yourself and enable yourself to reach financial independence. I believe it needs focus and energy.

Set Goals

I have a set of goals which I want to achieve. These are broken down into different categories so that I am not just focusing on financial goals the whole time. I want to have fun too!! The categories I use are:

  1. Financial- where I break them down into short term goals (reach this month), medium term goals (24 month goals) and long term goals.
  2. Family and Friends
  3. Learning and Experiences
  4. Health and Exercise
  5. Career

It is important to then review those goals regularly. I set aside an hour every Sunday morning between 8.30 and 9.30 to review my goals.

Have a vision board

By creating a visual representation of all the things you want achieve and by putting it in a place where you will see it every morning, a vision board can serve as a brilliant pick-me-up first thing in the morning. It will remind you of what you are trying to achieve, help you to focus on the bigger picture, and help to put you in a driven mood for the day.

I created my vision board by searching for JPEGS all over the internet and then printing them all out on a piece of A3 paper. I have stuck it on my mirror to look at every morning! The cleaner may think I’m a bit mad, but it serves an awesome purpose!

How to Raise Your Energy Levels

Exercise it a wonderful way of raising your mood and energy levels. I take a run every morning around the local common, come rain or shine, for about half an hour. This serves as my way of waking myself up for the day ahead, helping to keep me in shape, and raising my mood- exercise releases endorphins, the feel good hormone.

I don’t think it matters what you do, just start doing some form of exercise- preferably first thing in the morning- this could be walking instead of taking the bus, starting to lift weights 3 times a week, or signing up to a local football team.

Food also plays a part

I am very interested in the way food affects our mood and energy levels, and recently went on a course called “nutrition for everyday living” to boost my knowledge.

If you want to maintain energy levels throughout the day and be your best it is important to avoid processed food which cause a spike in blood sugar levels and then a trough in energy levels- foods to avoid includes processed foods such as cakes, biscuits, white rice and white bread. Instead eat lots of raw vegetables and nuts.

Another great thing which I learnt recently is that some foods contain serotonin or help the body to make serotonin. Serotonin is the calming chemical and helps to control stress and boost your mood, so getting lots of it is a good thing! Foods which do this include- oats, bananas and walnuts. So if you really want to start the day off well have some porridge with a chopped up banana!



Why Government Cuts Are Necessary

All around us there is a lot of opposition to the government cuts which the UK government and other Western Economies are currently pushing through. These cuts are very important to maintain economic strength though and we have to endure some significant short term pain for long term gain. Let me explain.

Focus on the UK Government

The UK government is currently running a massive annual budget deficit, indeed at the end of 2009 the public borrowing requirement was 11.5% of GDP. This means the government is spending vastly more than it receives in tax revenues each year. In addition the UK already has government debt which is forecast to be 94% of GDP by the end of 2011. Each year the UK is adding to its debt pile and as the debt pile gets larger and larger it becomes more and more difficult to service. If the UK continues as it is doing there will become a time when its borrowing won’t even cover the interest payments on its debt. Then, of course, the UK economy is in a world of trouble, and economic armageddon is on the horizon.

If at the end of 2011, as forecasts suggest, the UK government debt stands at 94% of GDP this will clearly not be sustainable. Even more concerning is that the proposed cuts in government spending will only shave 1.3% off the annual budget deficit each year from 2011 and 2015. This means our debt to GDP ratio will keep going up and up. In a decade’s time, forecasts from the Bank of International Settlements suggest our debt to GDP ratio could between 150 and 200%!

What does this mean?

Sooner or later the bond buyers of the world will wake up and realise that it is not a wise investment lending money to a government which is so indebted for such a poor yield. When this event comes, it will mean only one thing, the UK will be forced to raise interest rates so that it can offer a better return on its bonds to incentivise investors to fund its debts. Of course, raising interest rates will be mean that the economy will grind to a halt again as it will hit all the UK homeowners on variable rate mortgages. This, of course, could result in a further bout of quantitative easing which would be very much inflationary.

What can countries do when they have too much debt?

Well they have 3 choices, which are all pretty bad.

1. They can inflate it away
2. They can default on their debt obligations
3. They can devalue their currency- making their debts worth less in foreign currencies.

At the moment the UK appears to be using a combination of 1 and 3. UK CPI inflation is more than double the Bank of England’s 2% target, it currently stands at 4.5%. The pound is far weaker than it was only a few years ago. Back in 2007 a pound bought you $2.10, that figure now stands at $1.65. Likewise in 2007 a pound bought you 2.49 Swiss Francs, today it only buys you 1.5. Oh well, at least all this might mean a boost to the Cornwall tourist industry!

What does this all mean for UK investors?

Prepare for inflation. Invest in real assets- commodities, precious metals and real estate. It might be sensible to diversify the currency of your asset holdings too. As I have said before, look for strong currencies with well run governments. The Swiss Franc and Norwegian Krone look good bets to me.