Is an investment shortcut the way to a quick profit?
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In this week's column, financial expert Peter Sharkey discusses how investors might be able to retain more of what is theirs.
Perhaps it's human nature, impatience, a lack of discipline, or a combination of all three, but our apparent willingness to seek short cuts probably accounts for the frequency with which savers and investors ask themselves whether, by doing A or B, or maybe investing in X or Y, they can bank a quick profit.
Frankly, unless they're incredibly lucky, the answer is a resounding 'no'.
James Dyson's experience proves the point. While developing his eponymous vacuum cleaner, the inventor, industrialist and all-round good guy exhausted his savings and, incredibly, produced a staggering 5,126 prototypes before creating the perfect vacuum. The temptation to take an occasional short cut must, at times, have been overwhelming, but Dyson persisted; today, he's worth an estimated £3 billion.
Not surprisingly, almost all of our attempts to boost our bank accounts in double-quick time are undermined by an uncanny propensity to miscalculate, misjudge or misinterpret. Let's just say we're prone to errors of judgement.
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This conclusion should not, however, prevent us from trying to tip the scales in our favour, but the most effective way in which investors can do this is by not losing money, or giving it away unnecessarily, in the first place.
Indeed, there are a series of simple rules to which investors should adhere which will enable them to retain more of what is theirs.
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The first, and most obvious, is to reduce the impact taxation has on your savings. I'm not advocating the establishment of some opaque offshore tax vehicle which deliberately evades tax, but something very simple and extremely tax efficient.
Taking advantage of annual tax allowances makes enormous sense, which explains why people pour money into ISAs every year.
Cash ISAs are understandably popular, although returns are modest, with fixed interest accounts currently offering no better than 1.60% a year. Savers seeking to improve upon this might prefer the 'stocks and shares' ISA, into which they may place up to £20,000 during the current tax year.
Admittedly, not too many people have a spare £20,000 knocking around with which they can embark upon their ISA journey, but nowadays, it's possible to open an ISA with just £1. It follows that getting the ISA ball rolling is one of the best saving-related habits you can have. Investing just £150 a month in a stocks and shares ISA, assuming a 5% annual compound return, would build to £10,200 in only five years, the gain on which (£1,200) would be completely tax-free.
If ISAs are a good idea, so too is awareness. By this I mean it helps if you know what type of investor you are.
Researchers have discovered that our investment choices are often influenced by factors that could be genetic or determined by our backgrounds. For instance, people who experienced hard times during their youth are likely to own fewer investments than those who were at the opposite end of the economic scale when growing up.
In addition, psychologists at Harvard University found that sad people save less, while folks who are happy or angry are inclined to accept more risk than normal when making their investments.
And let's not rule out wishful thinking. In other words, there's no point believing returns will suddenly soar simply because you've opened an ISA, but what type of return can you expect?
Research by Barclays shows that annual stock market returns have averaged around 5% since the end of the nineteenth century, so it's reasonable to assume a similar level of return over the longer term.
Finally, there's enormous merit in embracing the 'get rich slowly' mantra. While a lottery win or a handsome return from those Premium Bonds you received for your 21st birthday might solve burgeoning financial woes in an instant, the laws of probability almost certainly exclude such a likelihood. Instead, accept that, just as it's easier to lose weight slowly, so it's simpler to save more over the long term in an attempt to reach your saving goals.
To conclude: yes, a one-off boost of several million would be perfectly acceptable (I do not subscribe to the view that 'all that money would make you unhappy'), but consider this: you have a greater chance of being decapitated by a frisbee than winning the Euromillions jackpot. Worth bearing in mind when mulling over the benefits of opening an ISA…
THE WEEK IN NUMBERS
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For further financial advice take a look at Peter's column, The Week In Numbers.