Investing is easy when you know the rules, and according to today's guest, there are only eight rules to investing.
If you're interested in becoming a successful investor today's show is for you as we discuss the eight rules of investing with Stuart Wemyss.
Stuart is a financial planner, an accountant, a mortgage broker, and a successful property investor. He's also an author, and he's with us today to talk about his book Investopoly.
Interview with Stuart Wemyss
Why did you write Investopoly?
- Investing is easy when you know the rules – just like winning the game of Monopoly. I wanted to shares these rule – a simple formula to help people build wealth and not get fooled into investing in dud investments.
- The rules aren't my opinion. They are simple, irrefutable laws, rooted in math and logic. They are evidenced-based and can be observed working in markets for decades.
- Applying those laws makes it very easy to (1) avoid making mistakes (2) work out what to do next and (3) be a successful investor.
Golden Rule #1 Play the long game
- Long term financial decisions promote exercising delayed gratification – patient investors are rewarded, impatient ones are not
- Market are not efficient in the short run – so thinking short term creates anxiety and doesn't help you invest wisely
- Over the past 30+ years returns are relatively similar: Aussie market = 9.25%, property market = 12%, US market = 10.5% - so its not a question of which "asset class" provides the best returns. More about which asset class suits you and your stage of life.
- Best question you can ask yourself: "what action can I take today that will result in me being a lot financially stronger in 10, 15 and 20 years?" Completely ignore short term impacts.
Golden Rule #2 Know how much income you need and by when
- Stephen Covey's advice: "begin with the end in mind".
- You don't need a map until you have a destination.
- You need to set two important goals: how much income you need in retirement and by when?
- Look at what you are spending today – that's probably a good indication of what you will need
- You have to expect to live a lot longer due to medical advances. Will you live until 90? 100? Therefore, you don't want to have to eat into capital in retirement = get asset mix right.
- Retirement increases the risk of clinical depreciation by 40% - due to the absence of contribution and growth. So, maybe the answer is to keep working? Or find something to do in retirement that "contributes" to others and things that promote personal "growth".
Golden Rule #3 Spend less than you earn and invest the difference regularly
- Commit to an annual surplus that you will contribute towards building your financial future (this could be home loan repayments, super contributions, property, shares, etc.), then spend what's left over.
- It is your ability to consistently allocate a surplus cash flow (year after year) that will have a massive impact on whether you will be a successful investor.
- If you are not a "saver" then redefine "saving" as "future spending"
- Merely just measuring cash outflow is typically enough to bring it back into line:
- I suggest allocating all outflows into seven categories: financial commitments, utilities, health and education, shopping and transport, entertainment, cash and other.
- If you don't have a surplus income at the moment:
- Reduce the regularity of any big discretionary items e.g. go out to dinner once every 8 weeks
- Commit to saving future income increases (pay rises, bonuses, etc.)
- Make sacrifices like holidaying every 2-3 years instead of annually
- Get help from an accountant to help you measure and manage cash flow.
Golden Rule #4 Grow your asset base first and then tilt towards income
- When we build a house, we do it in a certain order because that yields the most efficient and robust build. We should invest in a certain order too – for similar reasons.
- More income = more tax. Whereas with growth you don't pay tax until you sell the investment. This is the power of compounding capital growth.
- Compare two investments that generate a gross return of 10%: 4.5% income + 5.5% growth versus 2% income + 8% growth = 21% higher return in 20 years' time after all tax is paid! That is the power of investing for growth first and then tilting towards income.
- Select assets that provide most of their total return in growth and relatively low proportion of income
- How will capital growth help fund retirement? Sell assets, with enough time income will be substantial, invest in other income-style assets, sell one property and reinvest in bonds, etc.
- You need to develop a financial model in order to work out how much to invest, when and in which asset classes.
Links and Resources:
Michael Yardney
Metropole
Stuarts's special offer: Save 30% off the price of his book Investopoly
Go to https://www.prosolution.com.au/books/ and use the code "Yardney" to get a 30% discount.
Some of our favourite quotes from the show:
"I've found that it's not just understanding the rules, you've actually got to stop people making mistakes. You've got to stop people from doing what they feel like doing and getting emotionally involved, rather than sticking to the rules." Michael Yardney
"You're going to require a lot more money in retirement than you think. First of all because you shouldn't compromise on your lifestyle, and also because you're probably going to live a lot longer, so you don't want your money to run out before you do." Michael Yardney
"If you don't have an asset base, you don't have any money choices." Michael Yardney
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