Just as there are (allegedly) many ways to skin a cat, there are also many ways to measure your investment success. Of course we can focus on the usual metrics like portfolio value, annualised growth, ROI, IRR, trailing 1yr yield, however sometimes there are other less obvious milestones that we pass on our investment journeys that indicate success.
Below I’ve collated some of the moments along my journey to date that have reinforced the feeling that I am making real progress towards my ultimate goal of living under the money tree.
The day I clarified my investing strategy
The most common downfall of any investor is not deciding on and (perhaps more importantly) implementing a clear investment strategy.
For several years I fell into this trap. As a result I’d buy and sell on a whim, a whispered tip or a vague hunch. Following fads, chasing trends and staying safe in the herd would often be behind many of my trading decisions. Unsurprisingly the results were mixed.
Over time I implemented the following principles which have defined the strategy behind 95% of my equity investments over the last 10 years or so:
- Invest capital in defensive, dividend paying companies or low cost (ETF) funds thereof
- Focus on companies that aim for long term real increases to dividend payments
- Favour businesses with low capital demands
- Always re-invest dividend income
- Never sell unless the fundamental strategy of the company is failing
- Diversify, diversify, diversify
- Minimize taxes and fees
Clarifying and committing to a clear strategy was a great moment in my investment career. Firstly it added a huge slice of objectivity to my investment decisions. It also gave me a clear check list from which to screen potential investments as well as helping me to protect my capital.
I still make poor investment decisions and will likely continue to do so. However now when I do I can go back and analyse what went wrong. Do I need to tweak/improve the strategy or self flagellate myself for deviating from these principles? Either way I can no longer blame anyone else but myself.
The day that I doubled up for free
One day when analysing some of my holdings I realised that for one particular company I held more than twice the number of shares I had originally bought. By reinvesting the dividends received over a few years I had doubled the amount of share I owned.
This one is pretty self explanatory really. There is something incredibly satisfying when you’ve acquired more shares in a company or fund through reinvested dividends than you paid for in the first place with your hard earned capital. I’d effectively doubled my holding for free!
When this happens it is real proof that the wonders of compound interest actually do work. Compounding is a long journey that can bore the tears off you at first. However as the graph on this page shows, the longer you play the game the more you win.
The Day my NISA bought me a house
Well not exactly. I’m talking about the first month when the dividend income from my NISA produced was equivalent to the rent I receive on one of my rental properties.
For many reasons this was a great psychological milestone for me to reach. For a long time my portfolio has been (and still remains) overweight in the property sector. Having my NISA portfolio throwing off the equivalent of one months rent was a great boost and proof that I was materially diversifying my investment income streams.
What’s more….
- Due to the tax advantages of NISAs, this income was (and will forever be1) completely free of income tax (unlike my rental income)
- The assets that produced this income are free from capital gains tax should I ever decide to sell them2
- Unlike my rental property there was no leverage present. I owned all of the capital that produced this income.
- By investing in equities (and funds) that aim to increase dividend payments this income should increase in real terms over the years
What struck me most was that this milestone was achieved in a month where I was on holiday for two weeks and travelling with work for one week. I hadn’t traded that month, in fact I’d barely checked the stock markets performance at all that month. The solidity of my investment strategy was paying off.
The day I smiled when one of my investments halved in value
Once you have a clear strategy in place you tend to find that most failures arise because you didn’t stick to the strategy. I call this type of event an ’emotional failure’. It means I probably got caught up in some heady mix of greed, optimism and/or fear and strayed away from the plan.
Recognising these failures will only serve to make you a better investor in the future. Take them on the chin and treat them as learning events that make you a better investor. When you can look at an investment error and almost be thankful you made it you know you’re well on the way to becoming a better investor.
Tomorrow
When you can see you chosen strategy working and continually gathering more and more momentum, things start to get exciting. When you start to experience sustained success your natural instinct is to seek more of it.
The only thing I find more pleasant than milestones i’ve passed is the ones that lie ahead. Without wanting to wish my life away the ultimate measure of success will be the day when I achieve financial independence and no longer need to go to work in order to maintain my lifestyle. Bring it on!
How do you measure success?
Notes:
1 Assuming the government don’t decide to punish responsible savers
2 This will only ever be done in an emergency
Hi,
I like your idea of gauging success other than by just using financial measures because what we’re doing when we save and/or invest is far more than just put coins into a box. We also commit to making lifestyle changes in recognition of the fact that we are reviewing what we want from life and are planning how to get them. There’s a massive difference between the two activities.
I would say I’ve just reached a milestone along the way as my S&S ISA transfer to Interactive Investor has just completed after over 6 months. I consider this a personal success because taking the step to transfer my ISA was a big one for me and it required me to start thinking about, reading about and researching investing – something I had never done before. Now that my ISA has transferred and I am fully in control of managing it I feel like the biggest hurdle is out of the way and, although the leaning curve has been steep (and a little scary at times :-)) I have come quite far.
Cerridwen,
6 months to transfer an ISA….crikey. I thought one of mine was bad when it took 4 weeks!
Congratulations on taking control of your investments. If you remember to minimize your fees and fully understand/recognise the risks that any potential investments really offer I’m sure you’ll have a lot of success.
@UTMT, I know exactly what you mean. This month I expect to earn £2,100 in dividends and my expenses I predict to be £2,000. This is the first month where my passive income > expenses, so theoretically this month I will be FI. Sept is one of those months when dividend income is high. I do need to diversify though, 100% of my income is generated by dividend paying shares.
Jon,
First of all congratulations on your first month of FI – that must be a nice feeling. How do you plan to diversify the income?
@UTMT, something like £2K per month from dividend shares, £1K per month from fixed income (bonds, cash etc when interest rates climb) or the ideal diversified scenario would be £1K per month dividends, £1K per month fixed income, £1K per month from a mortgage free BTL. But I’m note sure how I would take to BTL, I’ve never tried it before although I have many several family members who have many BTL properties …. but have no interest in dividend shares or fixed income.
Jon,
It sounds like you need to set up a family investment partnership so that you can all diversify your investments by pooling your assets together! BTL isn’t something to be feared in my experience. However with prices likely due for a correction sitting on the sidelines for a bit might be the best option.
I hope the lions share of you equities are wrapped up in NISAs?
@UTMT, I filled my NISAs to the max but still got significant capital outside in my wife’s name (lower rate tax payer). Of course when I finally purchase bonds I need to do a bit of switching as the coupons will get taxed outside of a NISA. As far as the family investment partnership goes, from my experience its definitely best to keep your finances separate !
Hi UTMT,
My measuring stick will be similar to yours. I want to continue investing in Income Streams that eventually cover the cost of my expenses.
Congratulations Jon! That must have taken a huge effort, with much dedication and discipline to reach your first FI month. Very inspiring.
When I get to the end of the year, I plan on measuring my growth rate, income received and capital invested. I want to then improve on that performance next year, and then the year after that etc. I enjoy competing against myself and stretching the boundaries of what I think are possible. Hopefully the continuous improvement will lead to FI.
Huw
Hi Huw,
Any reason you only measure your investment performance at year end? If you are adopting a passive approach I guess this makes sense.
Personally I perform a full valuation of the portfolio at every month end. As a result, I always have a set of metrics that shows a ‘trailing 12 months’ performance. Personally I find this a great motivator as even in months when prices (and therefore portfolio valuation) fall, I can look to other metrics like trailing 12 month dividend income and reassure myself that the income keeps increasing and FI is a little closer.