The accumulation effect
I recently read the book The Accumulation Effect, which was written by a friend of mine, Stephen Oliver, who runs a successful company called The Will Company in Northampton.
The basic principle of the book is that whatever you do, good or bad, the repetition of that behaviour has an accumulation effect. So, if you keep eating too much food that is fattening and bad for you, you will gradually increase in weight until you become obese and unhealthy. If, on the other hand, you eat a healthy diet and small meals, over the time you will lose weight and become healthier. Makes sense, doesn’t it?
In the same vein, if you invest your money poorly, if you lack discipline and don’t re-invest your profits, if you keep withdrawing money, if you keep changing strategy etc., you will get poor results. On the other hand, if you invest your money well and keep adding to your portfolio, your money will grow, it will literally accumulate.
In my book Wealth Magic I gave the example of an individual earning the average salary in the UK of £27,000 a year, who saved 10% of what he/she earned over a career of 40 years. I assumed an investment return of 10% p.a. net of charges. What was the result? An investment that grew to more than £1 million! This takes no account of any property bought during the individual’s lifetime, nor the inevitable pension, nor did it take into the account probable increases in salary in excess of inflation. Remarkable, isn’t it?
The accumulation of your investment doesn’t just mean not touching the capital. It also means re-investing the dividends and interest. When you bear in mind that the average long-term return from shares is about 6.7% p.a., of which, approximately 3% a year comes from the re-invested dividends alone, it is a little wonder that the accumulation effect dramatically increases your overall return.
Of course, accumulating your savings is one thing, but are you doing it in the most tax efficient manner possible? Your starting point should be to maximise your ISA allowance of £20,000 a year. You should also consider paying voluntary additional sums into your pension. After all, both of these tax shelters are free of Income Tax and Capital Gains Tax. Pensions are generally free of Inheritance Tax, but the only ISAs that qualify for 100% Inheritance Tax relief are AIM ISAs and they have to be owned for at least 2 years before they qualify. The downside is that AIM ISAs are higher risk. So, if you are a cautious investor AIM ISAs may not be the best investment for you.
If you would like advice on how to make your investments grow by using the accumulation effect why not get in touch with me? You know it makes sense.