Book Review: Simple Wealth, Inevitable Wealth

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“The mortal enemy of investment success is fear.” - Nick Murray I was fortunate enough to buy Nick Murray’s book The Excellent Investment Advisor early on in my advisory career. It made complete sense to me, stressing the role of an investment adviser as behavioural coach. I recently heard about Simple Wealth, Inevitable Wealth on a podcast with a US-based financial adviser, I bought it - a 1999 copy set me back about £25 and it is worth it!

Some of my favourite lines from the book are below with my thoughts:

“”Wealth isn’t primarily determined by investment performance, but by investor behavior.””

Numerous conversations with clients have convinced me that we have our unique perspectives and biases around investing which influence our decisions. A great investment portfolio needs to have global diversification, asset allocation, low costs, etc. Given a well-constructed portfolio, clients who have the ability to stay detached and take the long-term perspective with patience and discipline can usually achieve greater financial success.

On picking a financial adviser:

“Do not care what they know until you know that they care.”

Since you are trusting your financial adviser with your wealth and your family’s wealth, technical capabilities and competence can only take you so far. Trusting in your adviser’s judgment is important and so take your time looking for someone you can really trust.

On Risk:

  • “People greatly overestimate the long-term risk of owning stocks. People seriously underestimate the long-term risk of not owning stocks.”
  • “The great long-term financial risk isn’t loss of principal but erosion of purchasing power.”
  • “The real long-term risk of equities is not owning them.”

Here, he means stocks as an asset class. Important to remember you only invest in stocks if you can stay invested for 5 years or more. If you haven’t ever invested in equity, that would be quite risky behaviour, according to him.

On Investor behaviour:

“The single most important variable in the quest for investment success is also the only variable you ultimately control: your own behavior.”

I have to agree and love that this is within our control. You can’t control the markets, economic forces of nature or will things to go your way. You can choose how you react to all of it.

On the active/passive debate:

“At the end of the day, it isn’t indexing v/s active management. It’s cost.”

The cost of your portfolio has a direct effect on the growth of your portfolio - an important factor in portfolio construction.

Really enjoyed reading this book & highly recommend!

A guide to investing in ethical funds

By Cleona Lira, 5th December, 2014

As an investor, your values and beliefs are important as a guiding principle on where to invest your money. Ethical funds are sometimes called ‘socially responsible investments’ used in place of ‘green' or 'ethical’, just different words for the same thing.

Ayn Rand, author of Atlas Shrugged, defender of capitalism would argue that capitalism rules, no matter what. However, not all investors wish to invest in profits gained unethically. Although, one has to remember that this is an investment, it is important that a positive return is made for the risk taken. Ethical investments are very well represented in the top quartile of performance tables.

Lisa Stonestreet, Programme Director at UKSIF (UK Sustainable Investment and Finance Association) says "Traditionally, investing ethically meant avoiding investing in companies involved in tobacco, defence, alcohol or weapons. Socially responsible investing has come a long way in recent years. It now includes investments  in companies that are successfully helping to solve environmental and social problems - water conservation, living wage issues and sustainable supply chain policies".

One of the biggest myths about investing in ethical funds is that they under perform; linked to this is the fact that people may have a narrow definition of ethical funds.  Whilst in the past, it has been mainly about "negatively screened funds" i.e avoiding tobacco companies, investing ethically now addresses broader issues - proactively finding solutions to modern problems such as aging populations, climate change or resource scarcity. So, a water fund may not necessarily be marketed as an ethical fund but it has strong sustainability criteria embedded.

With the strength of social media, companies are having to react to the force of public opinion. Western clothing retailers faced tough questions over the link between cheap fashion and worker safety in the aftermath of the Rana Plaza disaster, which killed a large number of factory workers in Bangladesh.  A business may have up to 1,000 suppliers - the businesses reputation also depends on the practices of its suppliers - its supply chain.

If more investors collectively requested better business practices, management teams would naturally shift their focus. When customers and shareholders align, powerful changes can happen. Businesses stand to benefit greatly too; some of the benefits for businesses to run in an ethical manner are public acceptance, customer loyalty, investor confidence and avoiding damaging lawsuits. Recently, I followed with great interest a blogger called Foodbabe that corralled shoppers away from spending money on sandwiches at Subway unless they removed a plastic chemical used in their bread.

So, how does one work out ethical priorities? It is important to work out what you feel most passionately about. What experiences do you hold important in defining how you would like to invest? It could be that you lost a family member to excessive cigarette smoking. Or it could be the issues of children's rights or child education is important - perhaps you would not like to invest in a company that is careless about its supply chain and uses children to work in sweat shops. Or it could be that you feel strongly about the environment and recycling. Or pornography. An IFA would typically hand out an ethical questionnaire to help you with this process where you could add positive criteria that you want as well as negative criteria that you do not want.

It is worth noting that the stricter the ethical criteria, the more exclusions and the more volatile the portfolio could also be.

The Ethical Investment Association (EIA) is an association of financial advisers from around the UK( of which I am a member too) dedicated to the promotion of green and ethical investment. If you need financial advice on investing ethically, you could find an IFA near you by visiting their site.

Related resources:

Three myths about ethical investing