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Make money doing nothing

There are few more satisfying things than investing your money and watching it grow. My view is the challenge of investing is making as much money as possible as safely as possible over the long term. It isn’t to make money quickly on big risky bets or riding the latest investment gimmick.

 

Once you’ve decided you want to make money safely over the long term you need a strategy to do it. And there is no end of advice out there from various books and experts, which in my experience boils down to these key concepts:

 

Compounding​

If an investment makes money, then that money can be reinvested to make more money. The money from the investment and the reinvestment can be reinvested again and so on so forth. This very simple concept of making money and continually reinvesting it is to cornerstone of successful long term investing.

 

For example suppose you invested £50k at a 5% annual return and reinvested the return annually. Over 40 years you’d end up with a profit of £302k. By comparison suppose you invested £50k over 20 years you’d end with a profit of £83k. The difference is huge at over £200k. £200k is a home in today’s environment.

 

“Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t pays it” – Albert Einstein

 

Diversification

There can be too much of a good thing and diversification is certainly one of those things. There are lots of rubbish companies out there (at the time of writing Capita, Uber, Twitter are few examples I can think of) and you can end up buying shares in rubbish under the justification of diversification.

 

With that being said, when it comes to investing: you don’t control the assets you buy, you can’t fully understand what you’ve bought, and there is every chance your investment will lose money.

The problem is analogous to poker. Even if you are the best player at the table and you’ve been dealt pocket aces you: don’t know what is going to happen in a hand, you don’t know what your opponents have and you can lose money even if you play the hand perfectly. The solution to this problem is to spread the risk by never committing much money to a single hand and instead playing lots of hands so that bad luck and good luck even out in the end.

 

The same approach should be taken to investing. Make lots of investments. But don’t make investments just because of diversification – that is analogous to playing any old duff hand in poker.

 

Keep costs down

Fees and taxes are losses. And just like how compounding profits are a miracle, compounding losses are a catastrophe. For example suppose you invested £4k every year for 40 years and generated a 5% return. You’d invest £160k and end up with £507k. But suppose you paid a fee on your investments of 2% per year, then you end up with £310k. You’d have paid almost £200k in fees on £160k of investment. £200k is a lot of money. It is quite literally a home. What in effect has happened is the organisation charging the fee is capturing a share of your return with money you risked.

 

Taxes work in a very similar way to fees. I personally find paying taxes less objectionable than paying fees to bankers but I’d still rather avoid them within reason.

 

To keep your fees and taxes down you need to: find investment platforms which are both reputable and cheap, minimise dealing costs by employing a buy and hold strategy, use tax efficient allowances like ISAs and pension contributions.

 

Liquidity

As I mentioned earlier, when you make investments you are not in control of the assets you buy and you can’t fully understand them. One solution to manage this risk is to diversify. Another solution is to buy assets which you can sell quickly (i.e liquidate) if you realise the price is about to fall or is falling.

 

You should be investing to make money safely over the long term. The issue of safety goes back to the whole reason for investing in the first place. You invest money so you have more money in the future. And the reason you do this is because it gives you a safe and comfortable future so that you can deal with unexpected illness, support a family member and or perhaps most satisfyingly of all – so you can tell your employer to shove their job where the sun don’t shine.

 

Making money from investing is buying safety in the future. And it turns out financial safety in the future is the same as freedom in the future. The reason to invest is to acquire safety and freedom.

But if you get involved in illiquid investments then you’ve lost safety and freedom in the present. You can’t sell, so you aren’t free. And you can’t avoid danger (i.e losing money), so you aren’t safe.

 

Driving around in a nice car that accelerates quickly, handles responsively and feels comfortable is great. But you won’t enjoy it if you don’t have a seat belt on. And buying illiquid investments – no matter how compelling the investment proposition – is like driving around a nice care without a seat belt on. You can’t enjoy yourself.

 

 

This article doesn’t help you decide exactly what companies you should invest in. I’ll talk about how I decide if something is worth buying in other articles.

 

However I can provide two bits of unequivocal actionable advice (in the UK at least).

  1. Start investing as soon as possible. Let compounding make money for you for as long as possible

  2. Max out any employer pension contribution. This has the double whammy effect of compounding your tax free pension contribution and compounding the free money your employer contributes

DasEquity.com is not regulated by the FCA. Content on DasEquity does not constitute financial advice.

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