The basics of investing – Why and How to invest?

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The basics of investing - Why and How to invest?

Investing is something that not enough people do. It is something that I started to do too late myself. For some people, it can be intimidating to begin investing.

But investing is not as complicated as people think. While it can be intimidating, this is something that everybody can do. But people should not start investing without doing their research.

This post is the first in a series of posts on Investing. This series of posts is to be an Investing Guide For Beginners.

It is the first post I am going to write about Investing. I am 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 a broad sense.

In this guide for beginners, 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 motivate some people to start investing. If you want this series to be available as an ebook, let me know, and I will see what I can do.

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

What is investing?

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

Investing is a vast 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 the 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 is 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 do not know it, you are already investing.

By having your money in a bank account, you invested money in your bank. Your bank account probably gives you some interest. And you are also invested in a specific currency. It is not the best form of investing. But it is 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. Do not have all your eggs 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 losing money each year. Currency Inflation is essential to consider.

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

Invest in material goods

The first financial investment is in material goods. Some material goods are investments that keep or increase their value. For instance, gold can be a good investment. It has always been considered 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, you will at risk of destruction or theft. I am no expert in material goods, though. But you should be careful about this kind of investment. I do not recommend you to invest a lot in material goods like this.

But some material goods are terrible investments. For instance, your car is not an investment. A vehicle will depreciate extremely fast! Even jewelry will depreciate. It is hard to sell jewelry at more than the price of its raw materials. All the craft that went into it is probably lost in value as soon as you buy it. Most of the things you buy will depreciate very quickly. As such, they should not be considered investments. They are expenses.

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

I do not say it is always a bad idea to buy a house. I am 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 is not so easy. Be sure to run the math before you buy a house. And do not get tricked into thinking it is 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. It is a somewhat passive income that many people are using to achieve 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 do not have my mind entirely set on this kind of investment. I think it is a nice way to diversify your portfolio if you have enough money. But I do not 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 a REIT (Real Estate Investment Trust). Otherwise through crowd real instate investing.

Invest in financial instruments

Financial instruments are what we are going to focus on this series of posts.

We are most interested in investing in financial instruments. There are many financial instruments: for instance, bonds, stocks, funds, futures, options. You need a broker to use most of these instruments. You do not 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 is essential to learn about them if you want to invest. You do not have to know everything about them. But a good knowledge of them is necessary if you are serious about investing. I will try to cover as much as possible about these financial instruments in the next posts. It should be your primary tool for investing.

How to invest?

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

There are some things you should do and some things you should not do. Once you know the basics, they can be applied to any form of investment.

Do your research

First of all, know what you are investing in.

There is no point in investing in something you do not understand. If you do not understand it, do some research, and once you 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 the instrument is about. For instance, if you want to invest in an Alphabet stock. You need to know about stocks, about brokers and about Alphabet itself.

There are no guaranteed returns

If anybody tells you of an investment with guaranteed returns, you need to run away!

There is no such thing as guaranteed returns. The returns on the stock market are not guaranteed. They are average over many years.

If something seems too good to be true, then it probably is! It is something that many people have failed to recognize. And the worst is when people you trust are recommending these investments to you. It can be difficult to say no.

So, be very careful with investments!

Have a goal

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 how far in the future you will need the money. It is very important in finding how much risk you can take. Generally, the longer your investment time is, the more risk you can take.

Be wary of people

You need to be very wary of people wanting to help you (helpers).

First, a lot of people do not know what they are talking about. Many people will give you investing advice, but they did not do their research. And then, financial advisors will advise things for you based on the commission they will get out of it.

You should be very careful about advisors that take a commission on what they sell. They do not have your best interest at heart. I am sure they are good financial advisors with only a fee and no commission. However, they are very rare.

You should also be aware of investment websites and blogs. Yes, even me! Many people are biased or have interests that you do not know about. Not everybody has your best interest at heart. Therefore, it is very important to do your research. Do not trust anything blindly.

Beware your emotions

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. Do not invest because very large returns have excited you on an instrument for some time.

Do not believe all of your friends with their financial advice. In most cases, this will not be good advice. Math and research are your friends for investing, not your emotions.

Diversify

Once you invest, you need to diversify your investments.

You know the adage, do not put all your eggs in the same basket. It is the same thing for investing. For instance, do not invest only in Technology companies. If there is a technology crash, you will lose too much.

Ideally, you want to invest in the entire market. Be careful not to 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 will go into more detail in the following articles.

Minimize fees

When you are comparing different investments, it is crucial to minimize the fees.

Most of the time, there will be several instruments that offer precisely the same things. What you want to do is take the one that has the lowest fees. It is 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 the time,  high fees do not translate into high profits.

Define your strategy

If you are serious about investing, you should define your 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). It will be a detailed plan for your investment goals and strategy.

Conclusion

The most important message of this first part of the series is Invest Now.

You should not be scared about investing. Once you have a plan and a goal and you have done your research, 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 make 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. If you learn about other people’s mistakes, you will be able to avoid some of them. But nobody is perfect!

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

When you decide you are ready, I have a guide to start investing in the stock market.

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

Mr. The Poor Swiss

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

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