How much time do you spend in a year preparing for your future, your loved ones’ future, and managing your money? Like many, I assume the answer is too much. Well, I suggest you take 15 minutes to sit down and discover the 5 commandments that will make you a happy investor. We will discuss the best practices to build a balanced wealth, but also the main traps to avoid. As you can imagine, the road to profitable investment is not a long and quiet one.
How much time do you spend during the year preparing for your future, that of your loved ones, and managing your money? Like many, I assume the answer is too much. Well, I suggest you take 15 minutes to sit down and discover the 5 commandments that will make you a happy investor. We will discuss the best practices to build a balanced wealth, but also the main traps to avoid. As you can imagine, the road to profitable investment is not a long quiet river.
Thwart the prejudices preventing you from becoming a happy investor
As in many areas, the lower our level of expertise, the more prejudices we have based on our experience or on what we hear. Investing and managing your assets are no exception to this rule. Let’s discover together the main reasons that may have held you back from investing in the past and becoming a happy investor.
Prejudice number 1: Saving or investing, is there a better strategy?
Semantics are important, especially when talking about money. If you had a sum of money to invest and you were told about saving or investing, which type of investment would you choose?
At first glance, savings is a reassuring term that evokes the ability of an individual to invest money from his or her salary or from an unexpected income in order to make it grow. It is associated with the notion of security and stable returns over time.
On the other hand, the term investment has a more random character in the collective mind. Often associated with the notion of the stock market or real estate, investment is perceived as being more profitable but above all more risky. Is this really the case?
Whether we talk about saving, investing or investing, we are talking about the same thing. The objective for an individual is to earn money from his investments while limiting the risk in order to meet a specific objective. Another definition of a happy investor?
Prejudice number 2: Investing in the stock market is only for the rich
Just like building a house, you build your wealth on a solid foundation. These foundations represent your ability to have a roof over your head and precautionary savings that allow you to see things through in case of a hard blow. For the time being, we are talking about savings, since the question is not to know how much money will be earned. But the main thing is to make sure that this capital is available at all times.
Once this reserve is reached, the amount of which is specific to each person, it is possible to be interested in investments requiring a longer period of investment such as the stock market. For this reason, stock market investments are mistakenly associated with people who have a lot of money. But in fact, whether a L’Oréal share is held for Françoise Bettencourt Meyers or an average person, it will have the same value (stock market price) and will pay the same dividend.
Prejudice number 3: Basing your investment strategy on the opinions of brokers and specialized magazines
We are not saying that brokers’ or specialized magazines’ analyses are not relevant. But to make a good deal on the financial or real estate markets, you need to have information that other investors do not have.
As a reminder, the principle of a market is to regulate its prices according to supply and demand. Real estate and the stock market are no exception to this rule. Valuation fluctuates according to the difference between the number of buyers and sellers. If you have more sellers, the value of your property will depreciate. On the other hand, an excess of buyers will increase the value of your property. In addition to that, there is a weighting coefficient according to the rarity of the property. We speak of liquidity in financial jargon. In other words, the more a property is available in small quantities, the more the fluctuations caused by the gap between the number of buyers and sellers will be accentuated!
So how to stand out from the crowd and not stupidly follow the herd. You have to analyze the weak signals. I’m not talking about secret information only held by the company’s management. We are talking about available information that seems insignificant to the majority of investors. Let’s take the example of a publicly traded company with excellent results and a full order book. On the face of it, there is no reason to sell the company’s shares. But what if you learned that the entire top management of the company had sold their shares? This is a great example of a weak signal!
Prejudice number 4: Relying on the past to predict the future
Every year, at the beginning of the year, you will find rankings of the best investments by category. This is a real business for magazines, which increase their sales on this occasion. But is this really a reliable way to build an investment strategy? You’ve probably heard the old adage that past performance is no guide to future performance.
Well, we thank Franklin Templeton for conducting a stock market survey comparing 13 major global asset classes over 20 years. The results are edifying, showing that one year’s champions are not tomorrow’s champions.
Prejudice number 5: You have to be reactive to market fluctuations
When the market plunges when you don’t expect it to, the logical reaction is to cut your position by selling all your assets. If you had stocks when the Brexit referendum result was announced, that’s probably what you did.
I remember discussions I had with salespeople from investment management firms describing the worst if Donald Trump came to power in the last U.S. presidential election.
And yet, these two events plunged the markets into turmoil barely ten days before everything went back to normal. When it comes to investing, you have to keep your cool and not react in a hurry. If you sell at a market low, it will be difficult to reinvest at higher levels because of the volatility. You risk seeing trains full of investors happy to hold stocks without ever being able to get in…
Always keep in mind that in order to make good deals, one buys at the sound of the gun and sells at the sound of the bugle. Even if intrinsically, taking profit is the most psychologically complicated exercise for an inexperienced investor. The happy investor is therefore a wise investor, especially in the stock market!
Apply the 5 precepts to become a happy investor
In terms of investing, you will probably be your own worst enemy if you let your emotions and doubts guide your steps. Once you know the pitfalls to avoid, all you have to do is follow the best practices that will lead you to profitability.
Build a solid foundation for your wealth
In the collective mind, we invest to earn money. But I assure you that in 90% of the cases, it is not the main concern. And you, have you asked yourself what are your motivations? If profit was the main motivation for making an investment, no one would put money in a savings account with a return of 0.5% per year. And in the same way, the overwhelming majority of French people consider that the stone is the best investment in the long term, but a minority of them have invested. And don’t tell me that the reason is the lack of financial means. It is possible to invest in the stone with credit from 10 000 euros of investment only!
Forge the fundamentals to get rid of the obstacles preventing you from becoming a happy investor
There is no magic formula for becoming a happy investor, any more than there is for being a good mother or father. So what makes the difference? Well, it’s your ability to set a framework that suits you. We all have aspirations in life for ourselves and our loved ones based on our upbringing and temperament. So why should we go against in the management of our future?
Respect your basic needs
You must have heard about Maslow’s pyramid during your youth or your professional career. If not, here is a quick summary of the concept stated by its creator.
In order to be able to flourish in life, you must build step by step the conditions that will lead you to happiness. These conditions are summarized in Maslow’s pyramid. You will not be able to fully realize your potential without having consolidated the first 4 floors of the pyramid. The same is true for your assets.
Define your living environment
Depending on your experience and your age, your aspirations will not be the same. The key is to know what they are and to do everything possible to match them. The right motivations are yours! So start by defining your priorities and the means you wish to devote to them, both in terms of money and time.
The best example of this is the main residence.
You can read as many articles telling you that you must necessarily own your main residence, as articles advising you against owning so-called unprofitable properties (no rental yield, high expenses).
The right way to approach things is to know if owning your own home is a need for security or not? If it is not your case, you will just have to make sure that you have enough income to be able to live in your own home, either now or in the future.
For the others, the answer is simple: you must become the owner of your main residence now if you have the means, or give yourself the means now to invest quickly.
To reach your goal, set goals
I still remember my project management classes in engineering school even though it’s been 17 years since I left school. My professor kept telling us that in order to achieve a goal, you had to:
- to have a very good knowledge of one’s situation (strengths, weaknesses, means available to achieve one’s project, constraints),
- define precise, quantifiable, ambitious but attainable, realistic objectives, with a deadline for achievement. Nowadays, we talk about the SMART method, which is a good mnemonic to remember it.
And I can assure you that this is essentially what is failing in your quest to become a happy investor!
If I tell you:
- I’m going to build up savings for a rainy day
- I want to prepare for my retirement
- I want to protect my loved ones.
Are these ideas that you want to implement? Then let’s make sure that you can implement them by first turning them into goals.
Don’t procrastinate and invest as soon as you can afford it
We always find good reasons to put off until tomorrow what we can do today. In wealth management, it is the same. I have time to prepare my retirement. I will make an appointment tomorrow with my insurer to review my pension contracts. I have money to invest, but I’ll keep it on hand in case I need it right away. I want to invest in real estate to take advantage of low rates, but won’t they be even lower tomorrow?
The best is the enemy of the good. If you wait until you’re sure you’re doing the best deal possible, you’ll never get anything done! And that may be the case with you.
Don’t jump at the first opportunity
There are two important steps in an investment project.
As we mentioned earlier, good deals are made at the time of acquisition on the markets. If you manage to buy a property at a discount or at least at its fair price, this will significantly increase your potential gain upon resale. So before you jump on what seems to be a good deal, make a thorough study to determine if the acquisition value is coherent whether it is for securities (stocks, bonds, mutual funds) or real estate. Because investing in real estate is not a trivial matter, especially if you want to invest in rental property.
And remember that the right time to invest is when:
- you have the financial means to do so (cash or debt capacity). The financial markets offer a wide choice of investments where you should find your happiness,
- A study will have been made on the legal and fiscal consequences of your investment decision.
Once you have all the cards in your hand, you will be able to make the choice that suits you best.
Give great importance to the legal and fiscal aspects for your assets
It is natural to be focused on the immediate gains (tax benefits, tax reduction…) and in time. But have you taken the necessary steps to protect your assets from taxation and the consequences of a life accident (divorce, death)? A bad legal arrangement or a hazardous tax choice can have very heavy financial consequences on your patrimony.
I will take two examples to support my remarks.
The need to make civil arrangements
The civil code is based on the Napoleonic era. It has evolved over time but has not been deeply questioned. Its major objective is to protect the family (married couple) and more particularly their children. All the provisions of public order go in this direction. But do you even know what a public order provision is?
Well, a provision of public order is a rule of law which cannot be derogated from. All other provisions can be adapted through a contract. In civil law, the contract one immediately thinks of is the marriage contract.
If we go back to the time when the civil code was written, life was very different from today. People got married and had children young. Divorce was not an option. It is clear that this no longer meets today’s standards. In fact, are there any standards left? For this reason, it is important to define the relationship between the couple and especially between the couple through a contract. This does not necessarily mean giving up on the community but rather adapting it.
Making the right choices in terms of taxation and acquisition method
The tax system can have a preponderant character in the investments especially if one makes a mistake in the set up. I would like to share with you a story that did not turn out to be very happy for the people concerned.
It concerns a family of entrepreneurs, in this case a father with his two children. The father wanted to make a rental property investment by buying a commercial property to rent out. Like any good entrepreneur, the father thought that an acquisition of business real estate should be done through a SCI. The notary commissioned to create the company favored the transmission to the children to the detriment of the father by proceeding to the dismemberment of the shares of the SCI. He granted the bare ownership divided 50/50 between the two brothers and gave the usufruct to the father. No decision having been taken from a fiscal point of view, the SCI remained a translucent company. The partners are then liable for tax according to its nature (property income, ISF and now IFI).
The operation did not seem so bad as the rents just covered the expenses and the monthly payments of the real estate loan. However, this was without counting on the taxation. During the first three years, the deductible expenses (notary and guarantee fees) as well as the work done on the purchase of the premises made the taxation completely painless. It was only a few years later that the father found himself with an annual tax bill of 12,000 euros (property tax, social security contributions, wealth tax) without receiving a single euro from the investment. Unfortunately, the only way he can now get out of the operation is to proceed to a donation of the usufruct of his SCI shares to his children. The father will have received nothing and just allowed his children to get richer. And all this for a simple reason: these children following a disagreement do not wish to sell the property and dissolve the SCI. This was not at all the objective of this father of family who wished to perceive complementary incomes for his retirement. We are very far from the account of the happy investor and for the blow only because of an inappropriate assembly!
Surround yourself with the right people to build up your assets
The management of an estate is a complex task that requires mastery of financial and real estate investment advice, taxation, law, especially civil law, and accounting. Of course, all these skills are necessary if we want to do it correctly.
Your heritage is your story. So it would be good not to entrust it to just anyone. Don’t forget that a happy investor is a person who has built a solid foundation for his or her wealth to protect it from the hazards of life (separation, divorce, disability, death in the home).
So if building a harmonious patrimony is a profession, which professionals can help you in this task?
- a family notary. He will be of great help in your real estate acquisition. He will save you time in your acquisitions while protecting your interests by conducting thorough research on the history of the property. Especially if you come across a real estate agent who is more concerned with getting his commission quickly than accompanying his clients, both sellers and buyers, in their respective steps,
- a trusted banker. Even if your relations are not at their best with your current bank advisor, you will absolutely need a bank to obtain credit, especially real estate credit. For your first investment, you have the possibility of going through a credit broker who will be able to direct you towards a bank corresponding to your profile,
- A wealth management advisor (CGP). As a specialist in wealth management, he will be able to support you in the legal, fiscal and investment fields. But be careful, when we speak about CGP, we think about professionals specialized in the advice and the accompaniment in the time. Do not confuse them with salesmen of Pinel or life insurance who will make you believe that these products are able to adapt to all situations, and thus particularly to yours…
I forgot the sinequanone condition for the alchemy to work with your team: all these professionals must be able to work together in your interest!