Finance: Going back to basics

PHUKET: This is something I often write about but so often find ignored by what is done in practice. When it comes to planning your financial future, there are only a few basic principles that you really need to follow. As long as you stay within these guidelines, you can make the odd mistake and still easily recover.

The first simple rule is that you should always save a minimum of ten per cent of your earnings and set them aside for your future. While this seems like common sense, it is amazing how many people spend every penny they get regardless of their income level. If their income goes up, their expenditures go up. Make a firm commitment to yourself to save regardless of your income level and it only takes a few years before you see how this can add up.

Once you start saving, ideally into a dedicated bank account separate from the one you use for your everyday discretionary spending, you should build up a minimum of six months’ worth of expenses before even considering making any investments. You also should obviously pay down any serious outstanding debts like unpaid credit cards. Credit cards should always be paid off in full every month.

Once you begin to accumulate significant savings, you need to plan ahead, which will help determine what kind of plan to make. Your first investment may be a down payment on a condo or house to live in, or you may begin making monthly contributions to an investment account of some sort. Make sure you know what time horizons the various asset classes have.

For example, real estate and stock market investments generally require a holding period of 10 years on the conservative side of planning. Of course you may be able to sell at a profit much quicker than this, but you need to realize that you may also need to hold them this long just to avoid losing money if you time it wrong. Some alternative investments have had faster recovery periods than the stock market and could be ideal for 5-10 year investments. If you already have a significant overall investment portfolio of financial and real assets, you can speculate with a small chunk in properties or stocks.

Thus, you should never invest money you expect to spend in less than five years. For instance, if you expect to put a down payment on a house in a year or two, you should not throw this money into the stock market to try to attain a return greater than a fixed deposit for the period. If you are twenty years or more away from retirement, you can place a greater part of your investment portfolio into more volatile stocks, such as tech companies, which could be expected to have capital appreciation over a long time frame, but make sure you can stomach the swings.

As you get closer to retirement you should re-balance toward fixed income, such as old and boring established companies that pay dividends and investment grade bonds. Of course, in the current environment, fixed income pays next to nothing, but this environment will not last forever.

The final basic principle not to be ignored is diversification. Never put more than ten per cent of your net worth into any one investment. The exception here is your home when you are starting out in the world. Even then, be careful of taking on too much debt with a mortgage that has a variable rate. It is better to pay off a smaller home first and then leverage that later into a second investment property.

Some people avoid financial markets completely and prefer the security of bricks and mortar. Other people move around so much for work that they have the bulk of their investments in financial assets. Whatever you do, you should be alright in the long run as long as you follow these basic principles.

David Mayes MBA resides in Phuket and provides wealth management services to expatriates around the globe, focusing on UK pension transfers. He can be reached at david.m@faramond.com or 085-335 8573. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.