A Savings PlanFor those of you who aren't aware (and why would you be?) much of the early investment theory used today came from one man. He was Ben Graham, an American. For some idea as to his effect on investment, think of Adam Smith to economics or Charles Darwin and evolution. Although, there were people after him who did research far more important in specific areas, he came up with original ideas. His groundbreaking book is called The Intelligent Investor. In it he puts forward a number of ideas for making profits in stock markets. However, his theory assumes that you follow the stock markets, that you understand company accounts and you want to put in a lot of time and effort to the whole enterprise. In his words, you bring something to the game. But what if you don't want to do that? He had a theory for that too. One that is backed very much by his protege, Warren Buffett (now one of the worlds richest men so might understand this). You become as Graham put it, a passive investor. The passive investor should decide on a very long-term plan that should not be altered by current events. No need to read the FT or think about it at all. No alterations should be made apart from a review every three to four years. They decide on an amount that will be put in each month and then an allocation between equites and fixed interest securites (things like bonds - loans made to governments that then pay interest on them). The shorter the period that they are saving for (when they need access to the money) the more of their funds should be in very safe homes like bonds. The money for equities goes into a fund that will just ride along on an economy (America or the UK, for example) and that is it. There is nothing more to decide. Once you have made the decision, you just let it run. The passive investor admits that he or she does not have the time or energy to keep track of it and move from one share to another every year or two and keep track of a portfolio of fifteen companies. The managers do that, so let them do it. In it's way, the simplicity is it's key. Basic knowledge tells us that over time we will receive better returns on our savings by investing them. Basic knowledge also tells us that shares tend to rise over time. Graham's theory though, makes us realise that the average individual doesn't know enough and so should not try. Just by trying you are taking a risk. And if you get the fund choice wrong? If you put (as he suggests) half of it into bonds, you are reducing the risk of doing that wrong too. This was quite possibly the first time that a method for building a savings plan was published. This is a system I believe in wholeheartedly. Why? As you understand investment more and more, the number of basic mistakes that an investor can make purely by accident are phenomenal. This route eliminates almost all of them. In the process it helps you keep the potential of losses at bay. Those of you that have had my help arranging long term savings plans will recognise much of the above. * This article was first published in October 2004 * Back to
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