I know – you’ve squeezed your post-Christmas body into a pair of now-too-small jeans, surrounded by clutter you’ve resolved to throw out – or at a desk in a job you’ve sworn you’ll escape in 2015.
You’ve already got New Year’s Resolution fatigue!
Well, sorry, but there’s a law that says all websites must produce a New Year’s Resolution list by the second week of January or else we get struck off.
Okay, not really.
(My new resolution: tell fewer fibs.)
Start as you mean to go on
Still, you are going to get a New Year’s Resolution list.
But at least this list will be better for your body than a commitment to learn to bake like Paul Hollywood, and better for your marriage than trying the Tinder app ‘once, just for fun’.
Let’s get down to it!
1. Pay off your debts
The average annual return from UK shares is about 8-10%, depending on which period you look at.
Many experts – including the regulators – think future returns will likely be lower.
It makes little sense to risk your money on the uncertain 8-10% return from shares when you still have personal loans, overdrafts or credit card debts charging anything from 6% to 20%.
Paying off these debts first is effectively a guaranteed return, and it’s tax-free, too.
A mortgage should be cheap enough to run alongside a long-term investing plan, if you’re invested in ISAs or SIPPs.
But if you’ve filled your ISAs and you don’t want to put more money into a pension, it may make more sense to pay down your mortgage.
Again, it’s effectively a guaranteed return, and nothing beats the feeling of being debt-free!
2. Spend less
There’s only one way you get into debt – spending beyond your means. I understand some people may be in straightened situations that they feel requires them to run up debts, though such a solution can never be sustainable.
But most Motley Fool readers have options, and could cut back.
Note that foreign holidays, living in the best part of town and buying a new handbag or season tickets to see your football team do not count as essentials.
3. Automate your savings
A good way to improve your budgeting and increase your long-term wealth is to automate your savings.
Simply deduct a hefty-seeming amount of money from your earnings every month. Put it straight into a company pension scheme or an ISA or SIPP.
By ‘paying yourself first’, you’re forced to economise elsewhere, as opposed to skimping on your financial tomorrow.
4. Be a long-term investor
Of course, you have to understand there is a financial tomorrow. Try experimenting with a pension calculator to envisage the retirement you’re headed for.
If it’s beans on toast in a bedsit, increase your savings while you can!
Most people will do better holding the shares they buy for longer, too.
Our CEO Tom Gardner suggests that whatever your current average holding period is, you should double it. He believes you’ll make better decisions, and also reduce the stress of investing.
5. Trade less
Holding shares for longer will automatically mean less trading, which for nearly everyone is a good thing. Studies have shown that traders are over-confident – some suggest a direct inverse relationship, where the more you trade, the lower your return.
You’ll also reduce expenses, such as broker fees, stamp duty and other transaction costs with fewer trades. It all adds up.
6. Do more research
That free time away from your broker’s dealing screen can be spent doing more research to find the best investments to buy and hold.
But be careful not to fall in love with your shares.
I see some investors who track their companies with the fanaticism of a serial killer. However, you will never know exactly what is going on inside a company, and you cannot know what unforeseen events could disrupt the business.
Research and aspire to hold long term, but keep a flexible mindset.
7. Give up on market timing
Ever heard of the behaviour gap? It’s the difference between the returns generated by a fund or a particular market, and the return the average investor actually sees.
And it materially reduces people’s wealth.
The behaviour gap arises because people chase winners, wait and hope for cheaper markets, or do any of the other sensible-seeming actions that are difficult to get right in practice.
Better for most of us to buy well and hold for the long term.
(If you’re the rare exception, open a hedge fund. They get their timing decisions wrong, too, so you’ll make a fortune!)
8. Invest tax efficiently
Some people say that because they’re basic rate taxpayers, they don’t bother with ISAs. Or they have no company pension and can’t see the point in a SIPP.
These people are not saving enough, not thinking long term, or else they’re destroying their returns through bad choices, overtrading or trying to time the markets. (See a pattern here?)
With adequate savings, a sensible investing plan, and average returns from shares in historical terms, you could someday have a big enough pot for unsheltered dividends and capital gains to be a problem.
Avoid it by putting your investments into ISAs or pensions (or both) while you still have the chance.
9. Reinvest your dividends
I’m amazed when I hear investors say they spend their dividends on treats such as Pizza Express.
They are giving away their future wealth.
I suspect the £30 here or £50 there seems immaterial compared to the total value of their growing investments, or even compared to their new regular savings.
But thanks to compound interest, reinvested dividends make up as much as 50% of the long-term returns from UK shares!
Reinvest your dividends to grow with the rest of your portfolio.
10. Know your goals
If you’ve calculated you need, for example, £500,000 in today’s money for the retirement you want, you’re more likely to make the necessary sacrifices, reinvest your dividends and keep your eye on the prize.
It works the other way, too.
If you’re later on in your investing life and you’re on track to have enough money to meet your goals, check you don’t have too much money in shares.
Remember the stock market can fall 30-50% in a bear market. That’s a bigger risk at 65 then at 35, because you’ve less time to make good again.
Don’t gamble with your future prosperity when you’ve already earned it. Reduce risk by taking sufficient money off the table when the time comes, and accept you will miss out on some gains if the market heads higher.
Investing is a marathon, not a sprint – in the final stretch just as much as at the beginning, and in December as much as in January.
