The basics of investing – Why do we need to invest?

Mr. The Poor Swiss | Updated: | Financial Independence, Investing
The basics of investing - Why do we need to invest?

(Disclosure: Some of the links below may be affiliate links)

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.

I have now been investing for several years. And it has become an important habit for me. Over the years, it has helped my financial situation.

This article is the first in our Investing Guide For Beginners. In this first article, we will see what investing is and why investing is very important if you want to reach your financial goals.

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 invest 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 article, we will focus on financial investing. The idea is to allocate time (or again another resource) to make some more money in the future.

Why should you 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 (although very little). 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. You should not have all your eggs in the same basket! Your bank account can suffer from inflation. In most countries, the interest rate on your bank account is significantly 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 physical goods

The first financial investment is in physical goods. Some physical 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, these goods 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 be 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 investing 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.

It is not always a bad idea to buy a house. We actually bought our own house. And we are going to save money in the long-term compared to renting. However, we would have made more from investing in a rental property, for instance.

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.

It is a nice way to diversify your portfolio if you have enough money. However, it takes a lot of time and is not something I am an expert at.

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. However, I do not want to invest too much time. I prefer to invest my money.

Invest in the stock market

Financial instruments are what we are going to focus on in this investing guide. We are most interested in investing in financial instruments on the stock market. There are many financial instruments:

  • bonds
  • stocks
  • funds
  • futures
  • options

You do not need to know them all. But, you probably need to learn about bonds and stocks. And funds are a great investing instrument. You will need a broker to use most of these instruments.

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 will 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 (Google). You need to know about stocks, brokers, and 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. The returns 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 essential to know how far in the future you will need the money. It is essential to find 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. Financial advisors will then 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 essential 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 huge returns have excited you on an instrument for some time.

Do not believe all of your acquaintances 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. And you do not want a single (or few) stocks. You want many of them.

Diversification is extremely important. I have an entire article about diversification.

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 will 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.

If you are not convinced, I have an article that shows the importance of investing fees.

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. But you can also do it simpler!

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 have done your research, you can 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 made 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 article of the series, I talk into more details about the different financial instruments available (for instance, cash, stocks, and bonds).

When you decide you are ready, follow my 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 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.

Leave a Reply

Your comment may not appear instantly since it has to go through moderation. Your email address will not be published. Required fields are marked *