Saving money is, obviously, the key to personal financial success. We have previously discussed how to save money for a rainy day. Having a backup plan, cutting costs and saving regularly are important steps to get your personal savings account growing. Unfortunately, it is not enough if your goal is to maximize your savings. Warren Buffet has taught us to invest in real businesses, think about valuations and only invest with a long-term perspective. Sure, but what concrete finance tips are there to save money? Let’s have a look.
Save money in Index funds
Finance is easier than most people think. Of course, you could scrutinize every balance sheet on Wall Street in search for the perfect investment opportunity. Or you could set up detailed criteria in a stock screener to identify the best stock picks.
Thankfully, it is not necessary in order to succeed financially and save money. Thanks to index funds you can get a broad exposure to the stock market without having to pick individual stocks. An index fund is a mutual fund or an exchange traded fund (ETF) consisting of a basket of stocks – a stock index. Considering that the average yearly return of the S&P 500 since 1957 is almost 8 per cent, an index fund does not appear as a bad deal.
Index funds are an excellent alternative to expensive mutual funds. History shows that very few fund managers beat the market in the long run. Yet, they charge up to two percent or more annually, which quickly erodes a fair part of your gains. Index funds, on the other hand, are cheap. Some index funds are even free, such as Fidelity ZERO Large Cap Index tracking S&P500, or the Avanza Zero which tracks the Swedish OMX30 index.
Buy holding companies
Not convinced that buying broad index funds is your cup of tea? Perhaps you wish to do some stock picking on your own. Yes, we agree – it is fun. Stock picking does not have to be complicated either.
One great stock picking strategy for both beginners and experts alike, is to buy shares in holding companies. A holding company owns shares in other companies. Warren Buffet’s Berkshire Hathaway is a good example. In contrast to mutual funds, holding companies have complete freedom in choosing which companies to invest in. They may also invest in unlisted public companies. Another advantage is that they almost always have a longer investment horizon than mutual funds. In contrast to mutual funds they often manage to beat the market in the long term.
If you wish to invest abroad, buying shares in a holding company is a great way of getting local expert investment insights. Within this category you will find companies like the French/European wine and spirits conglomerate Pernod Ricard. Or, Belgian Groupe Bruxelles Lambert with its Adidas and Burberry brands and Investor which invests in Swedish industrial companies.
Best of all – holding companies will not charge you a penny. You will pay standard brokerage fees when buying or selling your shares, but there are no yearly fees. We like to regard holding companies as a kind of superior mutual fund without expensive fees.
Many investors will tell you that buying is easy, deciding when to sell is the tricky part. One way of taking market timing out of the equation and reducing risk is to rebalance your portfolio regularly. It applies regardless of whether you buy index funds, stocks in holding companies, or any other assets.
What is rebalancing? When you rebalance your portfolio, you make sure to reset the size of each allocation at a regular basis. It means selling part of the funds or shares that have appreciated and buying more of those that have depreciated. For most people, a yearly rebalancing will be just fine.
Talking about risk, keeping a good diversification among your holdings is essential in order to achieve sustainable long-term financial gains. When diversified, your portfolio it is less likely to suffer severe losses in case of turmoil on the stock markets or individual company failure.
Diversify by buying several different assets. If you own stocks you may want to have at least 12 to 20 stocks in your portfolio. If you own shares in holding companies, you will be well-diversified with shares in a few companies since each of them likely own 5 to 15 or more companies. With index funds you will achieve good diversification with 2 or 3 funds from different markets.
Diversification might also be about diversifying assets types. Allocating a share of the portfolio in bonds in addition to shares is the obvious choice for many people. Gold or shares in a gold ETF is another way of diversifying risk. Preferred stock such as for example Akelius pref or REITs are other ways of diversifying your portfolio.
Diversification reduces the risk of losing money. Let’ wrap up with the mentioned Warren Buffet who famously said: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”. Sticking to simple rules in finance will help you save money!