Solving the Financial Investing & Trading Puzzle

By Gill and Michael Fielding

Have you ever wanted to invest for your future but don’t know where to start?

Designed to help everyone, from complete beginners to those who want to take their next steps in the world of investing and trading, this book can help you learn and more importantly understand how to create wealth using stable financial assets like shares.

Part strategy, part guidance, Gill and her son Michael embark on a year long journey to see if they can create a steady 10% return on the money they invest. Solving the Financial Investing and Trading Puzzle covers everything from…

• How you can start an investing portfolio with as little as the price of a cup of coffee.
• Learning the importance of regular savings and compounding and how powerful this can be over a long period of time.
• Strategies that work anywhere in the world regardless of currency.
• The difference between long-term investing with shares and regular trading with indices, currencies and commodities.
• Jargon busting, helping you get to grips with investing terms and phrases.
• Completely passive all the way up to active strategies.

This book gives you access to all of Gill’s accumulated knowledge for the best start to financial investing and trading.

• Language: English
• Publisher: Legend Press
• Release date: May 15, 2019
• ISBN: 9781789555585

Book preview

www.financialinvestingandtrading.com

1. Introduction

Week One: 1st – 7th May 2017

LESSONS and LEARNINGS

Fundamentally, we want to be able to do this wealth creation alongside our other lives and neither of us want it to be time intensive.

However, I think we may need to give it some thought in the early days and so I’m going to allocate about 10 hours this week to get this experiment started. Although I don’t intend for this experiment to be anywhere near so time intensive for me when I get rolling.

I currently don’t know how to invest or what I’m going to invest in, but having successfully created wealth both in property and in business I know that I need to get clear on a vision or plan. Whilst I’m learning about the ‘how to’ I need to know what I’m aiming at. So I need a year-long vision and strategic plan.

I’m going to start with a plan of my share Pyramid strategy:

The Basic Strategy

As with any investment portfolio, it pays to diversify and we need to have a share investing strategy to cover different requirements, strategies and attitudes to risk, and there are many different ways of making money from shares.

UNLIKE some investments such as property, shares do not easily fit neatly into alternating tiers of income generation and capital lump sums. If you bought a share for £1 and sold it for £1.20 within one month does that mean you’ve created income or capital? In the main we would define that as a capital gain but we can use it as income if we wish.

As a guide it may be easier to split investments into two categories:

INVESTING – where we are buying shares to hold for a relatively long-time for capital growth for our future. These shares are for the long term, for the rainy day, and may be held ideally in an ISA (Individual Savings Account) or pension where there are some tax perks too, but any savings pot will do. Share investing in this case is done INfrequently and takes less time to monitor or maintain.

AND,

TRADING – where the activity is more like a business done with the intention to make regular profits or income. Share trading tends to be done more frequently, in this case and needs more attention and maintenance. In general, share traders need more specialist skills and knowledge.

The Share Pyramid: Overview

We can use the simple structure of the Pyramid to create a share portfolio strategy, as follows:

Tier One at the bottom is this long-term, very diversified approach to share investing. Ideally these investments are in tax-free savings environments, like pensions or in a self select ISA. Ideally, you start saving and investing here as a child – or for your children. Investments made here are left for many years with little to no input or monitoring.

Tier Two is another capital, long-term investment tier and would involve investing in a well-established and proven strategy such as the O’Higgins strategy where you invest in a very small selection (normally 5 shares) in a large index like the Dow Jones in America or the FTSE in the UK. When applied, this principle is called the ‘Dogs of the Dow’ or the ‘Beat the FTSE’ strategy. At time of writing the 5 ‘Small Dogs’ (see more later) – have generated a 10.4% return per annum between 2000 and 2016. The UK version has generated an average annual 12.2% over the last 15 years. This strategy is only looked at once a year, so is NOT time intensive.

Tier Three involves more activity as an investor as it involves stock picking for long-term increases in value. This can either be done with a recommendation from a data provider or broker, or can be done by yourself where you look at the corporate fundamentals that establish a shares value. This is sometimes called the Buy and Hold Strategy.

Tier Four is about more active trading of any tradable item: shares, commodities or currencies and involves trading off information about the share price, and how it moves. This can be done with trading systems or data such as charts, stochastics, Fibonnaci waves, or MACD. It is less important WHAT you trade (shares, commodities or currencies) and is more about HOW you trade, WHAT indicators you use and WHY you buy and sell.

Tier Five is everything else! I include in here all the ‘Fancy Pants’ type of trading that you should NOT do until you have proper education and support and I include in this tier:

•    Any derivatives trading

•    Complicated options trading

•    Strategies like stock splits, and

•    Day, short term or swing trading

•    Dividend Chasing

In summary it looks like this:

The Pyramid, Tiers Timings and Risk

Pulling all those pieces of information together will create a strategic plan for any would-be share investor.

At the very bottom in Tier One, we invest very little, and generally invest regular savings of about £50 - £75 per month. The risk here is minimal; we can stop it quickly if we need to but the aim is to leave it for many years without touching anything: so set up a Direct Debit for the monthly savings amount and just let time fly by and create wealth! You can leave these funds for many years and if you’re doing this for your children, then perhaps leave it for 18 years!

At Tier Two we are taking a little bit more risk and with a little bit more money and over a shorter time period. It isn’t really worth investing in Tier Two unless you have about £2k to start with. If you only have £2k then start with the 5 ‘Dogs of the FTSE’, then when you have another £2k add the 5 from the ‘Dogs of the Dow’. If you have £4k then do those two together, then add the next 5 from the FTSE and the next 5 from the Dow. Overall, if you did all that then you could invest from £8k here (or much much more if you wish). This strategy needs to be looked at once per year.

At Tier Three we need slightly more input and slightly more time to watch it. We would need to research the fundamentals and make a decision. Ideally, you wold invest at least £500 in each share you want to invest in and it would need checking every month or so.

At Tiers Four and Five you risk much less and very little financially but you invest a lot more in terms of time. Any decent strategy at this level would require daily input of say, 10–30 minutes but you would only risk say 0.5% of your pot of money at any time.

Overall then, the Pyramid provides a complete balance of risk, reward and time input, as well as a structure for learning, development and changes in financial circumstances.

It can provide a structure for a lifetime of investing and trading!

To download your own copy of the Pyramid click on:

www.financialinvestingandtrading/Pyramid

.

Conclusion

This is a clear overview of our plan or strategy, we now need to explore and learn about each of these tiers in much more detail – and that is our one year's learning. Now we have that big picture of our year's activity both in terms of learning AND in terms of investments

Diary

Gill: It’s both exciting and daunting to think that were at the start of a year long ‘journey’ here but I know for certain that this is doable! I also know that we don’t need any fancy software or subscriptions – but we do need the Pyramid strategy as well as some targets and detailed plans - so that’s what I’ll concentrate on next.

Michael: I struggle with planning quite a lot so this structure really helps me focus.

Week Two: 8th – 14th May 2017

LESSONS and LEARNINGS

We now have a broad idea of my strategy for the year and now we need to set some targets and plans.

Let’s look at the broad target of 10% per year growth. How realistic is it?

The Basic Target

The basic target for annual growth with any of our investment strategies is always 10%: and that is a feasible target for share investing.

If we look at share values over the last 25 years we see a meteoric overall growth:

If we look even longer over 50 years, we find even greater growth:

Chart from www.stockmarketalmanac.co.uk

It’s interesting how the peaks and troughs that seem extreme, in the shorter 25 year graph, don’t look so scary in the second 50 year chart, even though the rises and falls would have been similar. Clearly, the longer our perspective or measure is, the less those ups and downs are noticeable and the less they hurt emotionally. Any short-term movement which seems dramatic on the day, looks far less so with the perspective of time.

It really does pay to look at this long-term. Not only is it better for the assessment of sustainable returns but it’s also far better for your emotional health!

I’ve also included two different types of UK share analysis: the FTSE 100 and the FTSE All Share – these are described in the definitions section – and for the moment I am using a variety of different share groupings, both UK and US to show you a broad picture.

But what’s the annual return?

The answer is: it depends on exactly what you measure and when you start that measure and end it.

For example: If we take the FTSE 100 (the biggest 100 shares in the UK) for instance. The index began on 3 January 1984 at the base level of 1,000; the highest closing value reached to date is 7,103.98 on 27 April 2015 and the highest intra-day value (at the time of writing) was 7,129 on 11 October 2016. So, it depends on what day – and what time of day – you sell your shares. If we just take the first and last dates here and extrapolate those figures, they broadly create a compounded rate of return of just under 7% per year.

Also, it depends on whether we account for inflation (most prudent) or not, and if we do, these are the returns by country over the whole of the 20th century.

Annual Equity Returns After Inflation During the 20th Century: Dr. Bryan Taylor,

As you can tell there is a variation in exactly how much a share will increase in value but we have a couple of pieces of evidence here that suggest it’s at least 7% and possibly nearer to 9% if we look at the Annual Equity Returns for the world between 1949–1999.

Also, these figures are just averages and contain the whole gamut of shares in all sorts of companies. With a little bit of simple stock selection (which we will look at shortly) to ensure we pick (broadly) the shares that are most likely to increase in value, rather than the entire cross section of corporate ups and downs, we can be fairly confident of the 10% return.

These are long-term trends of course and for our Fielding Financial customers we have a couple of simple strategies that even children can do: one that tracks the overall stock market, such that you get returns like these above; and one that has created a return that far exceeds it. We’ve included these later in this book.

If we look at the US market (and any UK investor can invest in these shares just as easily as they can the UK-based ones), we can see that over about 80 years US groups of shares rose between 9.7% and 12.4% annualised – and with all dividends re-invested.

The following are 10-year annualized percentage returns for the S&P 500 Index, U.S. Large Cap Value, U.S. Small Cap and U.S. Small Cap Value. Returns are in percentages.

DECADE RETURNS 1930 THROUGH 2009

Graph reproduced from www.marketwatch.com

There are TWO key points to note here:

1)    Reinvesting the income or dividend from the shares makes a massive difference. Remember the compounding mentioned earlier? The 10% growth is only achieved if all dividends are reinvested, and

2)    Understand that these are long-term results: you will see from all the charts above that there are up years and down years and it’s only if you invest over the long term that you can achieve them!

NOTE: US versus the UK stock market. Overall the US and the UK stock markets (and any major market like the Japanese, or the German) perform in very similar ways and with very similar returns but the US always has more statistics and charts than the UK (I guess we just don’t shout about our performance in the same way), and in any case you can invest anywhere in the world via your armchair so either market is equally available to you. Therefore, if it’s easier or clearer to use evidence from other markets then let’s use that.

Advanced targets

We are very comfortable using 10% as a target for the bottom three tiers of the Pyramid but we know that if we are going to put in any significant time and effort on the Tiers 4 and 5, we need to get a higher return than that – and again we are very confident that we can – once we have the knowledge!

Daily Diary

Gill: I’m already getting frustrated with all this planning and targeting when I want to INVEST! Of course, all the planning means I have more chance of success but I’m itching to start.

Michael: I like that all of this can be done in front of my laptop as I spend most of my time there anyway!

Week Three: 15th – 21st May 2017

LESSONS and LEARNINGS

The Personal Plans! - Gill

Now we have some strategic outlines we need to apply those to our individual personal circumstances.

As I’m older (late fifties at the time of writing) and need to protect my pension as much as possible, I have decided, certainly for the beginning in any case, to stick to the bottom two tiers of the Pyramid: the base level of Collective Investments (The Cappuchino Factor) and then the simple ‘Dogs’ strategy from Tier Two.

My understanding is that I can get 10% from those two tiers with little time input from me, so I’ve set my outline strategic plan as