Investing has never been simple, but at least it was logical. You buy shares in a company and in turn, you profit when the company is successful. It has never been easier to invest across the globe in a variety of shares, multi-asset funds, and index-trackers.
But the status quo is never maintained for long, and just as it has dominated retail, entertainment, and adult content, the internet has revolutionised the financial world.
We now live in a bizarre dystopia where a tweet from Elon Musk can wipe thousands of pounds from someone’s investment. Or where influencers are paid to hype a stock to artificially inflate the price. For example, Kim Kardashian has been criticised recently for promoting Ethereum Max, a recently developed, and untested, digital token. This is not to be confused with the more established (but still very risky) cryptocurrency Ethereum.
So, in a world where fortunes can rise and fall on the whims of a billionaire, and nothing has any real value anymore other than what someone will pay for it, how can we differentiate between a get rich quick scheme and a sound financial plan?
A Quick Guide to Get Rich Quick Schemes
Before the internet, most get rich quick schemes were thinly veiled scams. Today, many of the people promoting these schemes do so in genuine belief that they are helping their customers. Others have less altruistic motives.
Some of the trends circulating today are:
- Cryptocurrency, an extremely risky and volatile method of digital payment.
- Day trading, or attempting to profit from the daily, or even hourly swings in share prices.
- Meme stocks, where the price of a company is artificially inflated due to the efforts of social media users (See GameStop).
- Becoming ‘internet famous’ via Instagram, YouTube, or TikTok.
- Running an online business. A typical example would be a website offering courses which teach students how to create and sell their own online course (to users who also want to create and sell an online course – ad infinitem).
- Dropshipping, which allows you to start an online retail business without actually having to deal with manufacture, supply, or shipping.
- Multi-level marketing. This has been around for many years via companies such as Avon or Ann Summers. But social media has added an entirely new spin, and an unlimited potential market.
Some people have made money from these trends. But they are usually:
- Extremely lucky,
- Early adopters, who are positioned to profit from those joining later,
- Profiting from teaching others to do what they do (just Google ‘how to trade cryptocurrency’ or ‘how to become an influencer’ and you will find any number of ‘helpful’ business gurus willing to take your money),
- Outright scammers.
Survivor Bias
The problem is, we only hear about the people who are successful. For every Kim Kardashian, there are thousands of other people struggling to break even.
This is known as survivor bias. We are familiar with the success stories because they are more widely publicised than tales of failure. This means that when we search for a particular money-making fad, all we will see are stories of people who have built up vast riches. This becomes our perception of normality.
It also leads to confirmation bias. The more we start to accept something will work, the more we seek out evidence in favour of what we already believe.
The internet makes it easier than ever to indulge our biases and make flawed decisions.
What Really Works?
Planning Ahead and Doing the Sums
What do you really want to achieve in life? How much will it cost? What do you need to do to build up the amount you need?
These are the fundamental questions of financial planning and can help inform the decisions you make around earning, spending, saving, and investing. The earlier you start, the easier it is.
A Cashflow Plan (or Game Plan) can help you work out what you need to do, factoring in inflation, growth, and the amount you need to or should withdraw. A financial planner can help you build this, or you can create your own simple cashflow model here.
Cash Management and Debt Reduction
Before you even start to think about investing, you should aim to build up an emergency fund and have a plan for clearing expensive debt.
But at an even more basic level, you will need to think about your budget. If you can’t save enough to achieve your goals, could you earn more or spend less? Think carefully about those purchases, and only buy what you need or what brings you joy. Always shop around for the best deal.
Being Consistent
If you save regularly, the monthly direct debits will become part of your budget and you won’t notice them anymore.
Broadly, you should aim to save 5-10% of your income into cash or stocks and shares ISAs, which can be used to fund shorter-term goals. 10-15% should go into longer term investments such as your pension. These amounts will depend on your circumstances, and you will probably need to increase your savings over time. Get in the habit of increasing the amounts every year, and the transition will be seamless. See our Budget Planning Guide here for a generic breakdown of how you should consider allocating your income.
Success is not created in a day or two. It is the result of good habits, applied consistently, over many years.
The Miracle of Compound Growth
According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Compound interest means that you don’t only receive interest on your capital, but also on the interest that builds up. This can supercharge your returns and it is more effective the longer you invest.
Of course, with record-low interest rates, compound growth is a far more interesting concept, although the same principles apply. Over 20 years, a £100,000 investment receiving 5% growth per year could grow to £200,000, correct? No, because every 5% earned also receives 5% growth every year thereafter. Your £100,000 could actually grow to £265,000, a return of 165%.
You can find out more here.
Sensible Tax Planning
Your financial plan should not be based around avoiding tax, but saving tax is usually a side effect of good planning.
Investing in ISAs and pensions can help to reduce your tax bill and ultimately increase the amount you have available to achieve your goals.
How you extract monies form a limited company can save you tax (legitimately). Using your personal allowanced, CGT allowance and annual (IHT) exemption every year can save you tax. It is not just an accountant who can save you tax. A good financial planner can save you lots of tax too! It is one of the main ways they can add value.
An Investment Plan that Works
A sensible investment plan does not aim to help you get rich quick or require you to take massive risks in exchange for empty hopes of Kardashian-level wealth.
To invest successfully:
- Diversify across a wide range of assets, sectors and geographical regions.
- Take an appropriate level of risk, based on your goals, timescale, and the amount of fluctuation (volatility) you can cope with.
- Keep an eye on costs. Performance can vary, but charges are a certainty.
- Pay in regular premiums. Keep them going through thick and thin.
- Don’t look at your investments too often! Ignore the news. Keep the discipline.
- Review your plan regularly, and course correct if necessary. For example, it may be necessary to increase your monthly savings, or to re-align your funds with the right risk profile.
‘Slow and steady’ is the key to financial success. The key is to keep an eye on your plan, maintain consistency, and avoid being distracted by the next big thing.
Of course, not all modern day social-media phenomena are toxic. The FIRE (Financial Independence, Retire Early) movement embraces the above concepts, and encourages investors in their 20s or 30s to plan for the long term and achieve something real.
But just like anything else, it’s important not to get carried away with social media trends and to take real world advice when you need it.
Please do not hesitate to contact a member of the team to find out more about financial planning and your investment options.
