Manage your finances
The long term personal finances of individuals and families in almost all modern industrialized countries are in a state of crisis. The odd thing is how few individuals and families are aware of this. The root of the problem lies in the fact that citizens in most countries are nowadays refusing to accept any increase in taxes, particularly income taxes, so governments are no longer able to afford the cost of providing state welfare systems that care for their citizens from the cradle to the grave. A key factor contributing to the problem is the ageing of the population. In the Unted Kingdom the ratio of retired persons to working persons will increase.
In recent years, the cost of pensions, health care, insurance, education, housing and so forth has been rising inexorably year by year in most advanced industrial countries. If these facilities are being paid for by the state the proportion of the nations annual income taken in taxes must inevitably rise. If the voters are not prepared to pay higher taxes then these voters have no option but to pay for these services, or at least some for them, themselves. This inexorable logic has escaped the notice of most voters. Facilities such as a decent pension on retirement, proper health care, an adequate insurance shield to protect against the unexpected hazards of life, the secure investment of ones savings and wealth, the financing of accommodation for the family, even the education of ones children can no longer be taken for granted.
Self help is the order of the day. Whether most voters will actually relish having to arrange to finance all of these services for themselves, rather than allowing the state to provide them from taxation, is a mute point. What is not in doubt is that this is the way things are moving. These services will be arranged through personal pensions, life and health insurance, personal savings and investment, mortgage finance, and other financial services. Individuals who are willing to take the time and trouble can avoid the consultation fee altogether by designing their own financial plan. Preparing ones own personal financial plan is not as difficult as might be imagined. Many factors assist do it yourself financial planners. If the basic format of the planning process is understood, it is not difficult to fit the components of a plan together.
Investing in financial assets
Investment is not about picking winners. Efficient personal investment is not about choosing those shares that will be next to jump in value on the stock exchange. Some investment columns in newspapers and many investment newsletters are devoted to such an approach but an investment strategy based on this strategy will more likely than not lose you a lot of money. Yours overall investment strategy may have a place for picking winners but this will be the very last step in the long process of building an investment portfolio.
When you invest your personal wealth you should aim to achieve two objectives. First, aim to obtain a reasonable income from the investment. Second, try to move the value inherent in your investment securely through time. The first of these objectives is obvious to every investor; the second is much less so. For most people during most of their lives the second objective, that of moving value securely through time, should be more important than the first objective of maximizing the income from the investment. Unfortunately the evidence suggests that many investors, perhaps even the majority, are prepared to sacrifice security for a higher income. Many investors do not even realize that this trade off between income and risk is taking place. Yet the trade off between income and risk should lie at the heart of your investment strategy.
What do we mean by a real asset?
A real asset is a physical asset like an antique clock, a Victorian doll, a postage stamp, a royal navy brass bell, a painting or your home. Real assets can be contrasted with financial assets such as ordinary shares, government stock certificates, annuities, or a postal deposit in a building society. A financial asset is, in essence, a piece of paper, a legal contract between you, the owner of the financial asset, and the institution which sells you the financial asset.
Few people buy financial assets for reasons other than to gain a profit from the deal. You buy a financial asset in the expectation of gaining a future income from it. By contrast, few individual investors buy real assets for the sole, or even the primary, purpose of making a profit. They buy real assets because they enjoy the possession of such objects: they enjoy looking at beautiful objects or they like to build up a collection, or they want to show off their wealth to their friends.
One exception to the above rule involves those real assets that are bought specifically as a store of value and have no other purpose. Gold coins are an example of this, but there are others. Another possible exception to the rule involves investment in raw materials such as wool, copper and Soya beans. Few private individuals choose to invest in such assets and if they will almost certainly do so by buying futures or options on the given product in the derivatives market. Futures and options are financial assets, not real assets.
Investing in real assets can be fun but the evidence suggests that, on average, over the long term, the return on real assets is lower than the return on a diversified portfolio of financial assets which includes a substantial portion of equity shares. Real investments have, however, provided a much better return than fixed-interest investments over long periods of time during this century, at least in the United Kingdom. Most real investments have also provided the owner with a fairly good hedge against inflation.
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