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
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