Investing 101
The basics of investing I wish someone explained to me sooner
If you are a subscriber to this substack then you’re likely financially ambitious. And as an ambitious person, you want to see your wealth grow beyond what you can directly earn day-to-day. Even with knowing this, investing can still feel daunting and unknown which in and of itself can be a barrier to entry.
A big question is how do I invest? What should I buy? How can I get started? Really its what steps can I take so I can make sure I am making my money work for me. Learning how to make your money an asset is important and a lesson more likely to be taught at the dinner table than the class room.
So if you are curious but a bit overwhelmed, let’s start with the basics. Where can you open an investment portfolio. What are some options to consider when getting started. And how you can start making your money work for you. This isn’t investment advice, merely an overview of some of the possibilities available.
Type of Investments
Stocks
A stock in its essence is buying a piece of a company, a balanced portfolio means holding stocks of different companies in different sectors in different stages of maturation. This could be a range of companies from a start up you think will have a big impact and you want to invest in its future, companies you use as a consumer and want to support, or simply names you’ve heard of and would like a piece of. Buying a piece of the company means when the company does well they pay you a dividend as a thank you for supporting their business. The age old wisdom with stocks is to buy low and sell high, but its important to remind ourselves that knowing when those points are in real time isn’t something that can be predicted. A longer term approach to investing is to assume you are going to keep your investments long term and therefore you buy in when you have the funds available, one day it might be lower, the next higher, but long term you are better off for having started sooner. (That’s referred to as dollar cost averaging).
Dividend
Dividend investing is buying stocks specifically aimed at companies that have a history of performing well and paying out to their shareholders. This can be become a hobby for some people - researching company’s that have historically done well and the percentage of return you stand to earn. Reinvesting your dividends puts more money back into the company and increases your future payout if that company continues to do well. A dividend focused investing strategy is focused on maximising the returns possible from the stock market.
Index Fund
If you’re dealing with less than 1-2 mil in assets the general advice is to drop your money into an index fund. Index funds are groups of stocks pre-selected on your behalf representing the top performing companies nationally or internationally. The intention is that it takes the guess work out of individual stock selection and the volatility of seeing a company go up and down and panic selling. Traditionally, index funds perform better over time than individually selected stock portfolios. This is often touted as the best strategy for most investors as you can continue to buy and hold the fund while maintaining a diverse profile.
Treasury Bond
If you’ve read a book like Your Money or Your Life you would have heard of the benefits of buying bonds. Bonds are a way to lend your government money and earn interest on the loan. You would buy a bond for a certain period of time that would have a guaranteed interest rate return that the government would give you in return for the loan. The book was written through a US boomer lens and bonds are often not as appealing today as they may have been historically - its important to check the rates the government would be offering. It may be higher than a traditional savings account but how does it compare to the annual return that can be expected from other investment types?
Gold
Precious metals like gold, silver, and copper are finite resources that society uses and can buy and sell like any other digital investment type. Our currency used to be backed by the gold standard meaning for every dollar in existence there was gold in a vault that could be attributed to the value of the dollar, without us having to carry around gold or silver for every day transactions. Metals typically have a more stable value and can be a useful element in the diversification of your portfolio.
Tip: For whatever type of investment you start with, track how much you put in and the dividends you earn. This helps keep you engaged so you continue to regularly contribute to the fund, but also you can see the money that your money has earned. I use a tracker in Notion that you might find helpful for your own portfolio.
Investment platforms
Now that we might know the types of investments we want to buy into, we need an access point to the stock market. There are a myriad of services and platforms around the world so we can’t touch on them all, but think about what you might be expecting from a platform. I found it shocking how poor of a user experience a lot of platforms had and coming from a non-financial background it was intimidating at first. Others may charge a service fee for every transaction you make.
For instance, you know you want to go the index fund route so you go direct to the source. A popular choice is buying into the S&P500 and you could go to Vanguard.com and open an account to purchase shares of $VOO.
Maybe you are based in Europe and you want to start buying individual stocks - platforms like Trade Republic are available as an app and give you access to the whole stock market.
If you are in the UK then you might want to open an ISA and can use platforms like Nutmeg. While every country has a different approaches and options to take, investing is available universally.
Consider your risk
One of the most widespread teachings I had always heard of the stock market and investment is that it is risky! You can lose a lot of money playing the stock market.
And I would see graphs like these and that would confirm it for me. Look it just falls off a cliff, you lose so much!!
If you are “playing the stock market” and trying to guess the ultimate high versus the lowest low, you will likely be unsuccessful. But if you can use this as a long term tool then you can buy in gradually at whichever point, and over time, you can come out stronger for it. Then you will find yourself building your profile no matter where in the graph the market is and continuing to add to your investments over a lifetime.
And the final note, that is the most important and arguably the most difficult to convince anyone of, is to, whenever possible, start sooner than later. Time is your most valuable commodity.
The sooner you start investing, the more time your dividends compound and the more of those uphill spikes you have had your money in the market growing for you. I’m switching from my savings only mindset to investing in my 30s which puts me at a disadvantage if I had started when I was out of high school or in university. But I’d rather start now than not at all, and I will continue to encourage others to learn more to grow their own family wealth.
I could have used an article like this when I was first starting but that doesn’t mean it ends there - let me know what topic you’d like to see covered next so we can continue to grow our wealth together.