Have you ever heard the acronym, KISS – Keep it Simple Stupid or more politely, Keep it Simple Silly?
I was on a flight from Brisbane to LA recently and I had the privilege of sitting next to a successful business man who told me he is living his dream (his words). He had packed up his young family living in Mackay, QLD and made a lifestyle change to live in Cenmore, Canada, not far from the ski mecca of Banff.
We had a great conversation during the 13 hour flight, between watching movies and reading books. He asked what I do and I responded with the typical response, “I’m a Financial Planner!”
He then proceeded to explain to me that he took advice from an adviser (loose description) a few years ago and invested half a million dollars in a speculative stock. He has held the stock now for 6 years and it has gone nowhere, but “one day it will go through the roof” (he hopes).
Many investors, I mean gamblers, try to make a quick buck out of buying a speculative stock or investment they know nothing about.
I explained to my new friend that you can do very well by keeping it simple and investing in high yielding funds and stocks or investments that will consistently pay strong dividends. Once you have secured yields, you can then focus on growth over the medium to long term that will reward you for your patience and persistence.
I’m a strong believer in focusing on cash flow first. If you have cash flow, you can be less concerned with what the price does in the short term. As history shows, good quality investments will go up over the medium to long term.
The challenge for my new friend and people who invest in speculative investments is that they rarely provide the investor with income returns. He has held this stock, the price has gone nowhere and he has received zero income return over the last 6 years.
However the average annualised dividend yield for a quality, blue chip fund or stock over the last 6 years, is in the range of 4% to 7%.
So, if he had invested his half million dollars in a quality, blue chip fund or stock, he would have received a cash flow return of approximately $25,000 per year (at 5% yield).
That’s $150,000 over 6 years, and assumes no additional benefits from dividends reinvested over the 6 years.
So with zero capital gain, my new friend could have added $150,000 in cash flow return plus the the capital gains, by sticking with boring, simple, quality investments.
It’s important to know what you want to achieve, think with the end in mind, and understand why are you investing. Returns are important but you first need to know why you are investing.
Work out the ‘Why’ first (Direction), then the ‘How’ (Control), and finally ‘What’ (Choice). Once you understand these three elements, you are ready to start the process of investing in quality, reliable investments.
Keep it simple stupid!