Investing – 1. The Basics

Posted on Categories Broker, FIRE, Frugality, Investment
Investing - 1. The basics
This post is part 1 of 5 in the series Investing – All about investing.

 

This is the first post I’m going to write about Investing. I’m going to try to cover as much as possible on the different forms of investing. In this first post of the series, we are going to see what is investing in the broad sense.

I don’t yet know how many posts will be in this series. I will try to cover the basics, the stocks, the funds, Exchange Traded Funds (ETFs) and so on 🙂 Hopefully, it will be interesting for some of you and it will motivation some people to motivate.

I’m no financial advisor. I’m not nearly an expert investor. This post is just what I know about investing from my experience and from research. 

What is investing ?

What does investing mean ? The idea is pretty simple. It’s to allocate some money (or some other resource, such as time) in hope of making some benefit in the future.

This is a very broad subject. You can invest in your education in the hope of increasing your salary (or career) later. You can spend more time in your garden in hope of having bigger vegetables later. Many things you are already doing can be considered an investment. Even deciding to sleep more could be an investment towards a healthier life.

It’s impossible to cover all the forms of investment in one article. Or even in several articles. We need to focus on something a bit more precise. In this post, I want to focus on financial investing. The idea is to allocate time (or again another resource) in the hope of making some more money in the future.

Why invest ?

Even if you don’t know it, you are already investing. By having your money in a bank account, you invested money in your bank. This probably gives you some interest. And you are also invested in a specific currency. It’s not the best form of investing, but it’s still better than to keep your money under your pillow.

One reason to invest (more than your bank account) is to broaden your investment range. Don’t have all your nets in the same basket. Even your bank account can suffer from inflation. In most countries, the interest rate on your bank account is lower than inflation. That means that you are loosing money each year.

Another reason to invest is to become financially independent. You need your money to give you some good return to reach financial independence. This is the main reason I want to invest.

Invest in material goods

The first financial investment is in material goods. Some material goods are investment that keep or increase their value. For instance gold can be a good investment. It’s always been a safe value for many people. There are other precious metals such as Silver or Platinum which have good values too. However, they are not entirely safe either. Their values can also drop. Art and some collectible can also hold and increase in value. If you keep something at home, you are also taking on more risk. For instance, risk of destruction or theft. I’m no expert in material goods though. But you should be really careful with this kind of investment. I don’t recommend you to invest a lot in material goods like this.

But some material goods are really bad investments. You car is not an investment. A car will depreciate extremely fast! Even jewelry will depreciate. It’s hard to sell jewelry at more than the price of its raw materials. Most of the things you buy will depreciate very quickly. As such, they should not be considered investments. They are expenses.

The biggest investment in material goods is Real Estate. Your own house is likely not a good investment. You don’t collect rent since you live inside. Depending on the market, it may not appreciate very much. And you’ll spend a few percent of the value to buy it. You’ll also spend a few percent of the value to sell it. And you’ll pay a lot to maintain it. And most people will buy a bigger house once they sell the current one. Thus, it’s not an investment.

I don’t say it’s always a bad idea to buy a house. I’m still wondering whether I want to buy my house or rent. It could save you money compared to the rent you are paying now. It could also be the only way to get the house you want. But make sure to consider all the costs. Especially the opportunity cost of locking away the down payment. Although a lot of people will tell you to buy a house absolutely. It’s not so easy. Be sure to run the math before you buy a house. And don’t get tricked into thinking it’s a sure investment.

The other kind of real estate investment is rental properties. In that case, you buy a house to collect the rent on it. You leverage the value of the house, by only paying the down payment. This is a somewhat passive income that many people are using to achieve for financial independence. I say somewhat passive because you still have to find tenants or at least pay a home manager. And you may not have a tenant and lose a few months of income.

I don’t have my mind set on this kind of investment. I think it’s a nice way to diversify your portfolio if you have enough money. But I don’t think I will invest in rental properties for a long time. Once my portfolio is starting to look better I may reconsider. I think I will probably invest through an REIT (Real Estate Investment Trust). Otherwise through crowd real instate investing.

Invest in financial instruments

This is what we are going to focus on for this series of post. We are most interested in investing via financial instruments. There are many financial instruments: Bonds, Stocks, Funds, Futures, Options, … You need a broker to use most of these instruments. You don’t need to know them all. But, you probably need to learn about bonds, stocks and funds. That is what we are going to cover in the next posts of the series.

It takes some time to learn about these instruments. But it’s very important to learn about them if you want to invest. You don’t have to know everything about them, but a good knowledge is necessary. I will try to cover as much as possible about these financial instruments in the next posts. This should be your primary tools for investing.

How to invest ?

Even before you know in what instruments you are going to invest, you should know how to invest. You should have a strong strategy on how you are going to do it.

First of all, know what you are investing in. There is no point investing in something you don’t understand. If you don’t understand it, do some research and once you really know it, you can decide again whether you want to invest in it or not. You need to know about the instruments and about what is the instrument about. For instance, if you want to invest in an Alphabet stock. You need to know about stocks, about brokers and about Alphabet itself.

Then, you should always invest towards a goal. You need to know how much you need and when you need it. It is especially important to know in how long you’ll need the money in. This is very important in finding how much risk you can take. Generally, the longer your investment time is, the more risk you can take.

You need to be very wary of people wanting to help you (helpers). First, a lot of people actually don’t know what they talking about. Many people will give you investing advice but they didn’t do their research. And then, financial advisors will advice things for you based on the commission they will get out of it. You should be very careful about advisors that takes a commission on what they sell. They do not have your best interest at heart. I’m sure they are good financial advisors with only a fee and no commission. However, they are very rare.

You also need to be wary of your emotions. Most of the time, emotions will hurt your investing. You should not trust your emotions for investing. Don’t invest because very large returns have excited you on an instrument for some time. Don’t trust all of your friends with their financial advice. In most of the cases, this won’t be good advice. Math and research are your friends for investing, not your emotions.

Once you invest, you need to diversify your investments. You know the adage, don’t put all your eggs in the same basket. It’s the same thing for investing. For instance, don’t invest only in Technology companies. If there is tech crash, you’ll lose too much. Ideally, you want to invest in the entire market. Be careful to not overdo it. It does not serve to have too much overlap between the different instruments. And you probably want to diversify your financial instruments as well. You probably need to have some bonds and some stocks and not only one of the two instruments. We’ll go into more details in the following articles.

When you are comparing different investment, it’s very important to minimize the fees. Most of the time, there will be several instruments that offer exactly the same things. What you want to do is take the one that has the lowest fees. This it the thing on which you have the most control. By minimizing the fees and diversifying enough, you are going to replicate the market performance, minus the fees. The lower the fees, the higher your returns will be. Most of time,  high fees do not translate into high returns.

If you are serious about investing, you should define your own strong financial strategy. You need to set and write a plan on how and why you are going to invest. You can do it in the form of your Investor Policy Statement (IPS). This will be the detailed plan of your investment goals and strategy.

Summary

The most important message of this first part of the series is Invest Now. You should not be scared about investing. If you have a plan and a goal, you can start to invest. The longer time you have before you need the money, the more aggressive you can be with your investments. Define your plan and stick with it!

Everybody will do some mistakes while investing. I did my fair share of investing mistakes. You need to learn from your mistakes and avoid repeating them. And you should be fine.

In the next post of the series, I plan to talk into more details about the different financial instruments that are available (cash, stocks, bonds, …).

Are you already investing ? If yes, what are you investing in ? If no, why not ?

Leave a Comment