How to Create a Tax-Free Income for Life
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of ISAS, SIPPS, Investing, Stock Market on 13th November, 2011.
Tags: bull market, institutional investors, isaco, liquid millionaire, market health, market indexes, nasdaq composite, russell indexes, s & p 600, stock market, stock market summary.
How to Create a Tax-Free Income for Life
My passion in life is investing. I was one of the fortunate ones to have instant success when I first got serious about the stock market. That success early on in my trading career made my love and curiosity for the market strengthen. It’s now in my blood and I live, eat breath the market 24/7. Some would say I’m obsessed and maybe they are right.
Today I’d like to give you an overview of my Stocks and Shares ISA investment strategy. I have done this by presenting it as my ‘Top 10 Tips’ that and it’s good to note at this stage that many of the ten tips covered are used by real life ISA millionaires.
The first one is Make a Compelling Goal. It all starts with setting a very clear objective and your goal needs to be exciting. Make it a goal that helps you jump out of bed in the morning. And once you’ve made that goal you need to make a commitment to the attainment of it. Your commitment to achieving your goal needs to be a never go back decision.
The second is to Be Active. The most effective strategy when investing in ISAs is to time the market. In other words, instead of using a buy and hold strategy, you need to be active.
The third tip for successful ISA investing is to Buy Quality Investment Funds. When you search for funds to buy, focus on the ones being managed by exceptional fund managers. The key here is make sure the fund manager has proven they can beat the market in the short and the long-term.
Yes my fourth tip is to Park in Cash during Bear Markets. Bull markets (uptrends) tend to last between two and four years and bear markets tend to last between nine and eighteen months. Bear markets are therefore much shorter than bull markets. Because three out of every four stocks move in the same direction of the market, when the market changes from an uptrend (bull market) to a down trend (bear market) most investment funds will start heading lower at the same time that the market starts to head lower. This means if you go into a bear market and don’t move into cash you are going to get into big trouble.
My fifth tip which is Tax Shelters Equals Compounding Power. Many people don’t realise that money doubles in value over a five year period if it’s growing at 15% per year.For example, if you’ve got a starting amount of £100 and it grows at 15% year one, 15% year two, 15% year 3, 15% year 4 and 15% year 5, your £100 will have turned into £200.
How this works confuses a lot of people because if you add all the five fifteen percent gains together, the total is seventy five percent and not one hundred percent.
However, because you are leaving the money invested, it grows with compounded interest. Because of the way compounding works, it means in this case that the total growth adds up to 100% instead of 75%. What this means is money’s growth is ‘supercharged’ if it is left over time to grow over time. One of the reasons why a lot of fund managers fail to beat the market is that taxes kill their overall returns. In other words having to pay income tax, and capital gains tax means their overall gains are dramatically reduced.
This is also what happens to many private investors who don’t understand the power of ISAs. Because they invest outside their ISA they have capital gains tax to pay as well as income tax. After taxes have been paid, their bottom line is severely affected and many end up with a poor return.
My sixth tip for successful ISA investing which is Fight for Every Percentage Point. This tip ties back to the incredible power of compound interest.
You’ve got to fight for every percentage point and one way to do this is to use a fund supermarket like Fidelity’s Fund Network. Cofunds are another fund supermarket and Hargreaves Lansdown also offer a fund supermarket service.
When you use a fund supermarket to trade quality investments in the uptrends and park in cash in down trends, you keep fees and charges to a minimum. Fees can be as little as 0.25% and in some cases you can make a trade with a 0% charge.
My seventh investment tip is to Invest the Max every year. Right from day one make a commitment to adding the maximum ISA allowance for you and your partner and do this every single year. The maximum allowed has just increased from £10,200 per year per person to £10,680 per year. That means two people can invest £21,360 into the market every year. That means over a decade a couple can build up almost quarter of a million pounds and that’s without taking into affect any growth on their cash over that decade.
My eighth tip is Stay the Course. This tip means never cashing in your chips until you reach your long-term goal. If you do cash in early, you run the risk of living with regret. I’ve seen this happen time and time again. It’s horrible and it’s tragic. To win with ISAs and end up an ISA millionaire, you have to stay with this for the long haul.
My ninth tip for successful ISA investing which is Add Value. By continually increasing your value, adding the full ISA allowance, each and every year, becomes then easier to manage. Adding value is directly related to a person’s value to the market place. The rule is, people get paid for exactly what they are worth to the market place. And that means if you want to earn more, you have to add more value.
My final tip is Set Up a Withdrawal Plan. Each year you withdraw a percentage less than what you are able to grow your ISA money at. When you get this right, it means you no longer have to work, you can live a great lifestyle and you become richer each year.
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