Real, inflation-adjusted incomes continue to stagnate. Interest rates for savers are at rock-bottom levels – with most bank and building society accounts offering returns that, when adjusted for inflation, are actually negative. And generous so-called ‘final salary’ defined benefit pensions are going the way of the dodo.
So if you’re thinking that a decent nest egg is a smart move, you’re not alone. I’ve encountered several people in recent weeks who have been thinking hard about taking control of their own financial destinies.
And for them, the good news is that the government’s tax-free ISA wrapper regime has never been more generous.
A £20,000 tax shelter
This tax year, the allowance is £20,000 – a far cry from the £3,000 or so of not so many years back.
The contrast with pensions – where the tax breaks get more miserly with every Budget – couldn’t be more stark. For building serious wealth, and doing so in a tax-advantaged manner, ISAs are the way to go.
But not cash ISAs, of course. Not with interest rates at derisory levels, and likely to remain so for years. For serious wealth accumulation, stuffing your ISA full of stocks and shares is the way to go.
The right stuff
Nor need this be complex, or technically challenging.
So here’s my take on what really works when it comes to wealth accumulation.
- Save regularly. The discipline of regularly investing money does two things. First, it gets your money invested, and earning returns. No excuses; no “things are a bit tight this month, I’ll do it next month…”. It’s done, and that’s that.
But better still, it avoids the ‘investing at the peak’ trap. When stock market euphoria is at its highest, you’ll see people dive into the market, only to lose their shirts when the bubble pops. Buying regularly gets you in at the market’s lows, as well. - Stick to what you know and understand. Over the years, I’ve seen countless people seduced by shares they knew nothing about.
The discipline of investing only in businesses with well-understood business models may cause you to pass up on some stellar gains, but you’ll also duck a good-sized pack of dogs. - Hold for the long term. As a shareholder, you’re a part-owner of a business. Look for good businesses, with a business model that you understand, run by managers with decent track records, and a set of accounts not overburdened with debt or costly pension schemes.
And then hold for the long term, and let those businesses – and those managers – work for you, and send a growing stream of dividends your way.
- Costs matter. High costs sap returns – whether those are the costs of trading, holding shares on a brokerage platform, or the ‘spreads’ on thinly traded stocks.
So forget ‘chasing alpha’: you’re likely to have more success driving down costs with a judicious choice of brokerage, and an avoidance of costly trading in and out of poorly chosen stock picks. - Ignore investment fads. The dotcom boom, BRIC economies, oil shares, emerging markets, precipice bonds – I’ve seen every stock market mania since the Poseidon boom-and-bust of the 1960s.
By not leaping on board, I’ve certainly missed out on potential gains, without a doubt. But I’ve also sidestepped potential losses.
So is that it?
In my view, for the average investor, wealth accumulation amounts to little more than staying the course, investing regularly, keeping your costs down, and not doing too many daft things along the way.