It was in 2011, and I was traveling I Brazil, watching the Champions League final between Barcelona and Manchester United. Barcelona dominated 3-1, and the score should have been 5-1 or 6-1. For many people including myself, that Barcelona team was the best they have ever seen.
What was striking about them, however, was the simplicity. Sure, they could do remarkable things. The core of their competency though seemed to be the ability to do the simple things, like passing and shooting, better than anybody else.
For many readers who aren’t interested in football or sport, the same thing can apply in food and business. Gordon Ramsay is one of the best chefs in the world. One of the first things he does when he goes into underperforming restaurants is to narrow down the menu to around 10 items. Too much choice creates problems.
Investing is no different. One of Jack Boogle’s famous quotes is that “choice in investing is the enemy of the consumer”, and it is true. When writing my book I narrowed down financial freedom to 6 core things.
For everybody reading this, I would say you should narrow down your investment and financial planning needs to 5-10 core things, probably 5-6 at best. You don’t need to focus on other objectives.
I would suggest you focus on the following things. Some of these things will apply for you, and some won’t depending on your situation. Some apply to all:
1). Focus on getting at least a middle-income job. Whilst it is easier than you think, in fact very easy, to become financially free and/or a multi-millionaire on a middle-class income, it isn’t easy to become financial free if you are unemployed of course or don’t have an online income or another form of income. For people who are 18 or very young, getting the skills needed to earn must be priority number 1.
2). Watch your spending habits. They matter more than your income. This applies to everybody, full stop.
3). Read the academic evidence with an open-mind on finance, including then reasons why DIY investors tend to fail. Knowing the evidence isn’t good enough.Doctors know you shouldn’t smoke, be fat or drink, but most of them do at least one of these habits! Most people in financial services also struggle with these `human nature issues`. Be very candid with yourself. Do you have the needed character to face the challenges of becoming financial independent? If you can’t face volatility for example, or are the type of person who easily panics or gets greedy, it would be better to delegate this task to a professional.
4). Don’t ignore wealth protection. Health insurance isn’t needed if you are in many European countries, but it is needed in countless others. Life cover and income protection can be very useful, depending on your specific circumstances. Protection is dead money if nothing happens so limit yourself to a small fraction of your income on these products but don’t neglect them entirely.
5). Take advantage of tax efficient structures. If you are British living in the UK, that means using ISAs. If you are British living overseas, that may mean investing in SIPPS and so on. The same applies to Dutch, Americans and many other citizens. Depending on your nationality and residency, make sure you take advantage of tax-efficient structures.
6). After you retire, don’t withdraw more than 4% of your portfolio per year. If you don’t follow this rule, you risk either running out of funds or your kids may not get the inheritance hoped for.
To simplify matters further you could reduce this to just 2-3 steps:
- Read the academic evidence including evidence on investing, tax efficient structures, wealth protection and why DIY investors fail
- Get a middle-income (average) or better job if you don’t already
- Then decide if you want to DIY or use a professional to help you
Of course simple and easy are two different things. Knowing something isn’t as complicated as it first seems, however its great to imagine a better and more stress free future.