Weekend reading: Earning more and spending less is the best investment

Good reads from around the Web.

When I were a lad in the late 1990s, it was common for 20-somethings to put £500 into shares of some tech company or another that we felt we knew something about – or perhaps even knew somebody working at.

Our parents were mostly still to get onto email. It was easy to feel you had an extra insight into the dotcom boom.

As it happens, my colleagues and friends and I probably did know something about the ‘new economy’. But we knew very little about investing.

And we all know how that turned out.

These days the stock market is about as fashionable as fondue parties and donkey rides at Blackpool, so there’s not much need to warn anyone of the dangers of investing. Few have spare cash, anyway. While young people are rich in many ways, in 2012 it’s certainly not in terms of the folding stuff.

Some of the new generation are drawn to the markets, however. One young UK blogger, Rob, looked this week at investing on a salary of £18,000, for example.

I would never want to put anyone off investing, but be sure you have a sense of proportion. Putting £50 a month into an ISA to get a feel for market fluctuations while cash is tight I’d heartily endorse. But trying to invest your way to wealth on this level isn’t a great strategy, simply because it’s going to be decades before this sort of money moves the dial. You’d do better to focus on a side income.

As it happens Rob thinks he can save and invest thousands of pounds a year, thanks to low living costs in the North and great budgeting. If so, investing early could make a big difference to his future life.

But many young people will do better to focus on the basics at this stage of their life – which means growing their income and cutting their spending.

As TheZikmoLetter put it this week:

There are other ways you can achieve high returns on your excess cash, without incurring the fees and risks of Wall Street. You often will not hear these options recommended by anyone who gets paid based on transactions, fees or a percent of assets, but they often offer the best risk-adjusted returns, net of fees, taxes and inflation.

Its suggestions – pay off debt, cut spending, build an emergency fund, and invest in yourself – will be familiar to Monevator readers, but still seem to be novel in the wider world. One reader of Mr Money Mustache reported this week that following sensible money management techniques did more for his net worth than doubling his salary.

As the Mustached mister writes:

… until you see it applied to a real life like this, where the graph of your wealth takes a sudden bend and your mandatory work career is suddenly chopped in half, it can be hard to convince people of just how useful it is to understand your spending, instead of just endlessly chasing more income.

Investing from an early age is an excellent habit to adopt for long-term wealth.

But not getting addicted to fancy cars, cigarettes, or living paycheque to paycheque is even better.

From the blogs

Making good use of the things that we find…

Passive investing

Why tactical is impractical – Rick Ferri

Active investing

How to be a great investor, by choice – UK Value Investor

Why Apple’s falling share price could be good news – Asymco

Valuation investing drives the market long-term – Aleph blog

Other articles

The serenity prayer for investors – Objective Wealth

Christmas: A time for tat – Simple Living in Suffolk

Corruption in Russia and China – The Big Picture

Product of the week: A reminder that BACIT Ltd listed on the stock market last month, and can now be traded like any other investment trust. BACIT gives you access to a portfolio of active funds who are waving their fees for Cancer Research. The ticker is BACT. It seems to be priced a little above estimated NAV. Read the prospectus.

Mainstream media money

Highlights from the wall of noise…

Passive investing

William Bernstein: Don’t fuss over 12 basis points – Index Universe

Index firms must add value – Index Universe

Roth: Five ways I’m an active investor – MarketWatch

Bond funds Vs bond index trackers – Barrons

Active investing

Salmon: Is there something better than Vanguard? – Reuters

Thumbs down for Stobart’s retail bond – Fixed Income Investor

Swedroe: Why IPOs underperform – MarketWatch

China’s GDP growth not reflected in its returns – FT beyondbrics

…indeed, Merryn says Chinese shares cannot be cheap enough – FT

Like Moneyballed baseball teams, quants eventually flag – Morningstar

Other stuff worth reading

Why women don’t take risks with their money – The Atlantic

Japan’s hottest commodity: water – Bloomberg

Ten ways HMRC checks if you’re cheating on tax – FT

Families now need £25,000 a year to survive – Telegraph

Even The Guardian is now explaining how to keep child benefit – Guardian

Peston: No Lloyds or RBS government sales until 2014 – BBC

Book of the week: If you’ve been reading this blog for a while, you’ll know that much of what’s written about investing is nonsense. This is a well that never runs dry though, as Jack Schwager explains in his new book, Market Sense and Nonsense .

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