Hey there Finimizers! In this pack, we’re going to lay out the basics of the wonderful world of investing. Don’t worry though, we’re going to ease you in gently!
What even is investing? At Finimize, we like to distinguish between saving and investing.
Saving is sticking all your cash in a bank account, while investing is using that cash to buy assets – like shares in companies or property for example. You may already be a diligent saver, with a handy little pot of cash, but the problem is – over time – inflation will reduce the value of those savings.
Inflation basically means that every dollar, euro or pound, buys less stuff - be it toothpaste, jeans – or even a super-secret lair to store your luxury yachts! And those losses build steadily over time. For example, over roughly 25 years, a modest inflation rate of 3% will trim the value of your cash – in half.
That’s where investing enters the ring. Essentially, investing is all about trying to steadily grow your pot of money. Hopefully, with time, the relatively small annual gains build to something pretty impressive.
“I started really small. I bought things that I knew and understood – products that I used on a regular basis. I worked for Nike at the time, so I bought a ton of Nike stock. I used to drink Starbucks; I bought Starbucks stock. I just basically bought a little bit when I had money and I forgot about it when I didn’t.”
– Janus, Finimizer
Risk is one thing you will have to accept. Your nest egg might go down as well as up. But, bigger risks, bigger gains.
For many investors, the goal is simple. To stop their savings being eroded by inflation.
Our goal at Finimize is to provide you with all the tools and information you need to get financially savvy, and to open up the world of investing.
And guess what? It’ll only take you a few minutes each day! Oh - and another thing - there will be no tedious jargon here thank you very much.
Next, we’ll explain the three golden rules of investing...
At the foundation of investing, there are three golden rules.
But, unlike Dua Lipa’s rules, ours ain’t new, they're old. (Although we must agree with Dua that, if you’re under him, you ain’t getting over him.)
Rule number one of investing is all about balancing risk and reward. If an investment is paying a good return, it’s almost guaranteed to be higher-risk than one paying a modest return. That’s just life. Sorry. The return is literally compensation for you taking on that risk. If anyone tells you they’re getting a great return from investing in a sure thing, be very suspicious. You need to figure out what level of risk you find acceptable. In general, if you see the investment as a long-term endeavor, you should be able to tolerate higher risk. You’ll have more time to recover from any short-term losses.
“One of the things my mother always encouraged me to do was to take risk. I want to be a risk taker. Maybe it’s overconfidence, but I think it’s the right level of confidence. I am comfortable with what I’m invested in.”
– Atiba, Finimizer
Rule number two involves the concept of liquidity. Plenty of investments require you to lock away money where it’s hard to get at, or where you might struggle to sell quickly. Professional investors would say these are illiquid. In practice, this means it’s always a good idea to keep some cash on hand for emergencies. Most financial advisors suggest the emergency fund should be around three months’ salary.
The third and final rule is to be aware of the wonderous effects of compound interest. What’s compound interest you say? Let’s take an example. If you invested $100 in an asset paying a 10% return. After a year you’d have $110. Then after the second year you’d be sitting on $121, because you’d get interest on the original $100 and also on the $10 interest from the first year. And if you left that $100 alone for 10 years, you’d have amassed an impressive $259. Your pot will grow exponentially over time, as each year, the returns build on each other.
I’m sure you’ve heard it alllll before, “start investing as young as possible”. Of course, the best time to start investing is, well, 20 years ago. But guess what the second-best time is….. yup, you got it, it’s right now.
“I started putting money away early, no matter how much was available. Learning the concept of compound interest is key for anyone."
– Neil, Finimizer
Next, we will show you the best ways to approach the investing game.
So now you know the benefits of investing, and a few tricks of the trade. Now, let’s start looking at some of the different investment approaches.
First, you need to decide if you are an active investor or a passive investor. Both are great strategies, but your personality and time commitments will shape which is best for you!
Let’s start with being a passive investor. If you're a passive investor, you tend to spread your money across a few funds. Then you can sit back, and not give them too much thought. Maybe once or twice a year, you can check-in, see how it’s going, and tweak accordingly. More time to sip cocktails on the beach if you ask me.
If you’re an active investor, you are a little more hands-on. You’ll be checking the prices of their investments much more regularly, and will constantly be looking across the markets for opportunities to buy or sell. The goal, of course, is to buy low and sell high. Remember, you aren’t alone. There are millions of other people trying to do the same thing. You can’t all be winners.
If all this sounds like a lot of hard work... relax! Like so many things in life – there are people who will invest your money for you – for a fee of course. But, we’ll get on to that later.
And of course you don’t just have to do one thing with your money – you can split it up and keep some in cash in a bank, invest some in a passive fund, and use the remainder to actively trade some more risky propositions.
“I invest 90% in an index tracker or safe place and with the other 10% go gambling on small caps or derivatives – risky business but with big payouts. Just make sure you don’t reach into the 90%."
– Farrah, Finimizer
Want to know your stocks from your bonds? Next, we’ll break down the actual assets you can buy.
Let’s start with one general rule. Don’t put all your eggs in one basket, spread your money across several different assets. Then fingers crossed, any losses will be offset from your gains. This is what is known as building a diversified portfolio.
But let’s get more specific. What can you actually buy. Let’s start to build up a beautiful, balanced portfolio?
Let’s kick off with stocks (also known as shares or equities). Owning a stock means you own a very small part of a company, and can get a portion of the company’s profit paid to you periodically as a dividend. Stocks are often lumped together to make an index, some of which have become very famous over the years. For example, the Dow Jones Industrial Average aims to show the average performance of 30 top American stocks. When people talk about “the stock market” being up or down, they’re generally talking about the performance of an index like this.
As well as buying a company’s stock, you can also buy a company’s bonds. By purchasing a company’s bonds you own a small part of its debt – which means you are effectively lending that company money. Bonds are generally considered safer investments than stocks, because if a company goes bankrupt, its equity will be worth zero but its debt might still have some value. In addition to purchasing bonds in a company (known as corporate bonds) you can also buy a government’s bonds.
Next on the list of potential investments, we have commodities. That’s stuff like gold, copper – or even agricultural products like soybeans and orange juice.
It’s also worth mentioning cryptocurrencies. Financial regulators can’t agree whether bitcoin and these other digital tokens are currencies, stock-type investments or even commodities. Their prices can swing wildly, making them risky investments, but there has been growing interest in the sector recently. If crypto is your thing, and you want to know more, we have Packs for that right here.
“In my earlier days of investing I was pretty concentrated – I only owned stocks. I had the opportunity to put some money into a venture-capital fund, and all of a sudden that’s a huge amount of diversity. Property which – although people don’t really think of it as an investment – is a massive investment. So that added some diversity. And then the crypto boom came and went and came and went again. And somewhere in the middle of that I got curious enough to dip my toe in and put a little bit of money in there. And I ended up pretty diversified.”
– Carl, Finimizer
You can track the price of many of the previously mentioned assets by using exchange-traded funds (or ETFs). These are an easy, low-fee way to buy and sell, say, the entire Spanish stock market without actually having to buy lots of individual shares of companies in Spain.
Lastly, we’ll talk you through the steps you can take, to get invested.
You know the basics - now it’s time to get stuck in. If you want to put your money where your mouth is, allow us to run through the choices available.
The first thing to decide on is whether you are going to invest a lump sum, or instead make regular ongoing contributions.
If you make regular contributions, you can spread your payments over a longer period of time. This then reduces the chance of making a large investment just before a market fall. You might hear some people refer to this as dollar-cost averaging. Although, it also reduces the chances of investing just before a large market gain.
Oh, and if you’re putting aside a portion of your paycheck each month, we have one quick tip: try to shift money into your savings the moment you get paid. Don’t wait for the end of the month. Or, as the famous investor Warren Buffett puts it:
"Do not save what is left after spending. Spend what is left after saving.”
– Warren Buffett
In our earlier session, we talked about whether you want to be an active or a passive investor.
To be an active investor you’ll need to set up a brokerage account. Then you put your orders in online, or even over the phone. Just like ordering a pizza eh? Now that’s an investment I can get on board with. Trading regulations tend to vary from country to country, which means you’ll find different brokers, depending on where in the world you live. Big US brokerages include Charles Schwab and TD Ameritrade, and in the UK you’ve got the likes of Hargreaves Lansdown and IG.
OK. So what about the options for you more laid back, passive types out there?
The passive approach could lead you to putting money in a traditional mutual fund. This is where you pay a fee to an asset manager to select investments on your behalf. Alternatively, you can open an account with a robo-advisor. It’s basically the same thing, but with generally lower fees. Or you can be a little more adventurous and select a few exchange-traded funds to invest in.
“I prefer passive investment over active investment. I wasn’t making that much more and was putting too much energy and time into trying to beat indexed results.”
– Scott, Finimizer
Congratulations. You’ve completed Finimize’s Investing Basics Pack and taken your first step towards taking control of your money. And remember, if you want to delve deeper into any of the topics we’ve looked at – we have Packs for that. Take a look at our Packs on robo-advisors or commodities for example.
Before we go, let’s have a look at some of the key takeaways from this pack:
1️⃣ People who invest money – outside of keeping cash in the bank, tend to take on more risk, but with that risk, could come higher returns.
2️⃣ If you leave your money in cash, inflation will erode its value over time.
3️⃣ Some investors want to be very hands-on (a.k.a. active), while others prefer to sit back and chill (a.k.a. passive).
4️⃣ There are lots of different assets an investor can buy or sell. Many choose to build a balanced portfolio so any losses are hopefully offset against possible gains.
That’s all for now. And remember, it doesn't matter if you're active or passive, as long as you stay classy out there. Now take our quiz to test your knowledge.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.