One in five citizens are under either partial of total lock-down as of the end of March 2020. Today we’re going to discuss how you can leverage this once-in-a-lifetime opportunity to Beat Wall Street.
The place to start with isn’t what you would expect. It doesn’t involve finding unique, needle in a haystack growth stocks or taking on excessive risk (akin to gambling) by wagering on inverse oil ETFs, spread betting or currency trading.
The road to riches this year is simple and it involves careful, long term investment. We have Five Golden Rules that you can follow to get there, which we encourage you to consider before putting money to work.
(1) Set Your Accounts Up
For those of you who don’t yet have a brokerage account, the first thing to do is to setup one. You’ve got all of the time in the world to wait on the phone, even if it takes an hour, to open an account. Many banks will still do it and they will also link your brokerage account to your main bank account.
In the United States you can take your pick, opening a stock trading account with any of the major banks, or through Robinhood which offers free stock trades.
For U.K. investors we recommend A.J. Bell or Interactive Investor. Consider opening both a Stocks & Shares ISA and a Self-Invested pension (SIPP) because you get free tax back from the government.
Canadians can get very good service from the major banks, though CIBC Investor’s Edge has a competitive and simple fee model.
(2) Tax Efficient Accounts
Take advantage of tax free accounts first and foremost.
In the US that means your 401k, Roth IRAs, and 529 Education Funds. For Brits you’ve got generous SIPP contributions that you could be taking advantage of to get free tax back from the government. Canadians have TFSAs and RRSPs.
If you can earn free money right away, then you need to get money deposited into these accounts and ready to invest. We may experience further market weakness (aka: buying opportunities). For UK based investors that can mean as much as 40% free money from the government in the form of tax breaks for higher-rate tax payers. That’s a good return for sitting on your couch and doing nothing!
(3) Set Yourself a Clear Goal
Financial success is all about the boring stuff. Set yourself a goal and institutionalise the way that you save monthly, every month, without fail. That might be difficult now because of the Covid-19 health crisis. There has been an enormous amount of unemployment and it is a difficult time for everybody.
That being said it doesn’t stop you from creating a financial plan. We have previously covered financial planning in depth here. In order to help you do so we give fellow Frugal Investors free access to an excel template too!
As a fellow Frugal Investor I use this every month as I track my progress towards accruing £2,000,000 in net assets:
Click here to download your own free Net Worth Calculator and setting up a lasting plan towards a set goal (early retirement, purchasing a house, financial independence!)
(4) Decide in Advance What to Invest in & Stick to it
For anybody who isn’t very experienced in investing the best advice is to use a low cost, simple tracker fund that follows the entire stock market.
Each country has one or two key indexes that represent the bulk of the publicly traded companies in that region. Have a look here for an overview of all of the major world stock markets.
I mention this because it holds true even more today than it has in the past. The major stock market indexes are probably going to keep falling for another few weeks during the Coronavirus Health Crisis, but we will eventually get through this and come out the other side. Rather than trying to second-guess the market and pick winners, simply buy the entire market!
Here is an overview of key stock market indexes and the actual instrument you would invest in to buy them:
|Country||Stock Market Index||Investment ETF Fund||YTD Performance|
|United States||S&P 500||SPDR S&P 500 (SPY)||-20.86%|
|Dow Jones Industrial Avg||SPDR Dow Jones (DIA)||-23.58%|
|United Kingdom||FTSE All-Share||Vanguard FTSE All-Share||-28.9%|
|Germany||DAX||Horizons DAX Germany||-30.1%|
|Canada||S&P/TSX Composite||Vanguard FTSE Canada All Cap||-28.8%|
There are many, many different strategies that you can follow when it comes to deciding how to invest. We have put this section 4th on the list because, often, investors tend to focus too much on what they invest in and too little on how they invest (through tax free accounts, regular and often, every month!)
(5) Manage Your Emotions
If you buy an S&P 500 tracker tomorrow and the stock market falls another 10%, it doesn’t mean you’ve made a poor investment decision. When we look back on this period (today, 29th March 2020, for instance) we’re going to realise that “this too shall pass.” Even something as big, ambiguous, and scary as a global health pandemic.
Imagine this: in order for the S&P 500 index to return to the level it was on February 20th, 2020, it would need to rise 33.2%. That’s an enticing upside, that gets better and better the more it falls.
At the end of the day we want you to win, and now’s as good a time as any to set yourself up for the shot. Post your comments below if you have any questions. You can do this!
About the Author: David began Frugal Investors in order to help others learn about smarter money management – today. He has spent nine years working as a senior process improvement professional and has extensive experience helping FTSE 100 and Fortune 500 businesses to improve their efficiency, quality and speed of delivery.
Over that same timeframe he has built up a £1mn+ portfolio of stocks and bonds through self-directed investment. Follow David as he uses thorough, detailed investment research aimed towards accruing £2,000,000 in investable assets within the next ten years.