I am not a financial advisor, and the following is not financial advice. Some of my gameplan is basic common sense, while much of this strategy is only right for a select few investors.
My basic investing philosophy can be subdivided into three distinct phases:
Phase One
- Debt - pay off all debt, excluding your mortgage. In this increasingly tight monetary environment, credit cards and loans will cost more than investing returns and reduce your capacity for risk
- Emergency Fund - you need six months of expenses saved up in an easily accessible account. Equities tend to be worth less when you are more likely to need emergency cash, and the very last thing you want to do is realise a loss to survive a personal financial crisis
Phase Two
- Calculate your excess annual income
- 50% goes into your SIPP - which is almost ridiculously tax efficient for higher and additional rate taxpayers, and especially those eligible for child benefit, 'free' childcare, or universal credit
- For context, my marginal tax rate between £50k and £60k comes out at above 70% when factoring in all deductions. The downside, of course, is that private pensions can only be accessed in your mid-50s, and the government can change the rules at any time
- I target SIPP contributions almost exclusively at an S&P 500 tracker index, though make exceptions for downtrodden blue-chips that have been heavily oversold. Recent examples include Meta and Rolls-Royce
- The idea is to benefit from long-term S&P 500 capital returns (averaging 10% per annum since 1957), with very little risk over the longer term. I also hold some physical gold
Phase Three
- Invest the remaining 50% of my excess income into an ISA, and then buy shares in EIS-qualifying companies once I exceed the £20k annual limit
- I target high-risk, high-reward small cap shares, typically in the battery metals or biotech sectors
- I fully expect many of these investments to fail, but these failures to be offset by the successes. While this strategy is high-risk, the risk is mildly offset by my prosaic SIPP investments
- I have a strong history of excellent stock picks - though this is no guarantee of future returns
- I prefer FTSE AIM companies. These have very little analyst coverage, and so there are often exceptional opportunities within a cesspool of losers for those with the skill and inclination to hunt them down
Caveat Emptor
l rarely trade on leverage, instead preferring to buy deep value small cap stocks within an ISA to benefit from huge tax-free capital appreciation.
Currently, all UK investors have a £60k SIPP annual allowance and a £20k ISA annual allowance. As ISA contributions are made from net income, you need to make circa £100k of gross income per year to max out your tax shelters, and that's before even considering living expenses.
In my view, it only makes sense to start trading on leverage once you are earning over £150k per annum.
Trading on leverage means forgoing the tax benefits of a SIPP or an ISA, and then paying Capital Gains Tax on any returns. Further, 75% of typical retail CFD accounts lose money.
And even if you do make a profit, EIS investments deliver better returns if you are prepared to do the research.
Of course, highly skilled traders can make huge sums of money using leverage. But in reality, this is a very small number of dedicated professionals.
And as there's almost always another retail trader on the other side of leveraged trade, their income is derived from the losses of amateurs.