Black Star Private Wealth Management

Diversification is an often used term in the investment world.

There are many different ideas that world renowned investors, such as Ray Dalio, have brought to the public.

His ideas on diversifying in uncorrelated stocks have been an eye opener to most and it’s this type of unique thinking which places Ray Dalio in the pantheon of investment gurus.

I want to take a look at diversification from a different perspective, according to time.

Some people think you need to diversify your stock purchases immediately or in the near term, for example if you were to spend £3000 on Stock this year they would say you need to spread that across 6/7 different investments.

I say you could spend that £3000 on only 1 or 2 investments.

If you were to repeat the same practice over the next 4/5 years, choosing different stocks each time, that could over time give you a well diversified portfolio.

The obvious benefits of buying stocks like this would be reduced fees, instead of paying your broker 6 or 7 trading fees for that £3000 invested, you would only be paying them for trading once or twice during the same period.

Reduced volatility could also be a benefit but I will save that for another post.

But over a lifetime of buying stock, especially if you are intending to hold for long periods as Warren Buffett suggests, this type of buying is not as crazy as it sounds.

An age old question but something most people never actually apply in real life.

The short answer is yes.

I will illustrate exactly how you can build wealth from saving or rather investing £50 a month.

From the picture above you can see a phenomenon known as compound interest, a subject which I will delve into a little deeper on another post.

The interest rate I used was 10% annually, a very achievable rate from many investments.

You can see from the Year Deposits column even though the amount invested over the year remains the same, the Year Interest earned rises exponentially.

From the 2nd year interest doesn’t simply double as you would expect, it nearly trebles. This is how compound interest helps your money to grow so quickly, it takes your original investment plus previous interest earned and applies interest onto both and aslong as you leave your money invested it will continue to do so aslong as the equity invested in continues to rise.

By year 13 you can see Total Interest earned now exceeds Total Deposits, this means you are now earning more from interest than you have invested.

The magic of investing and patience.

By year 20 you have now earned more than double the £12,000 you have invested, from interest.

Your Balance now exceeds 3x what you have invested.

Here is another picture

Now this may be of more interest to you.

If you were to repeat the same principles of investing £50 a month to year 40 you now have a balance of £318,000 of which nearly £295,000 has come from only Interest.

Truly phenomenal I’m sure you will agree.

To take things to it’s extreme I have let the example continue to year 60.

Slightly unrealistic, as most people do not invest early enough to have a 60 year investment horizon, nevertheless, you can now see your balance sits at over £2.3 million, of which the majority has come from interest.

Investing and patience.

As a matter of humour you can now see how the figures at year 60 dwarf the £600 Year Deposit you are still investing.

Slightly comical but why change things now if they have worked out that well for you thus far?

You should also by now realise the importance of financial literacy and investing for your children from the day they are born.

You are literally changing their future by doing so.

The age old question.

Well to people who are thinking to the future anyway.

There are multiple ways to invest but my favourite is the Stock Market.

This seems like a risky business to those unfamiliar but there are a few facts about the stock market that you should know.

2 World Wars, a Great Depression, 9/11 and a Housing Crash have not been enough to stop the stock market.

Slow it down, sure.

But the markets have ALWAYS bounced back, no exception.

It would seem something as malleable as this would be a great place to leave your money.

Another fact.

The top 10 richest people in the world ALL own Stock.

This says alot doesn’t it?

Stocks create MASSIVE wealth, this is just fact.

£1000 invested in Amazon 20 years ago would now be worth over £1.5 million.

Now whilst most stocks don’t grow as quick as Amzn has over the last couple of decades, if you read enough you will learn that making a million from thousands is VERY common in the stock market.

With the content of this blog I hope to show you that the stock market is an amazing thing to be a part of.