Start With Learning The Investment Basics
Ready to invest? Great! But how ready are you? Because investing is a wonderful way to make more money and even change your entire lifestyle. If things go well. This is why you’ll want to think about what you’re doing before you do it. So, let’s start with the investment basics.
2.1 Why Should You Invest Your Money?
All those hours you’ve wasted in traffic jams. Every time you’ve been squashed into overcrowded trains. The difficult clients, colleagues and bosses you’ve had to deal with … You’ve done it all as part of your working life. You’ve overcome countless difficulties and suffered plenty of stress. And whichever way you look at it, you’ve done it all to earn money.
A good reason for investing
Now that you have a bit of money put aside, you have to decide what you’re going to do with it. You don’t need to be a genius to realise that the more money you have, the more financially secure you are and the more fun, cool and relaxing things you’ll be able to do.
Here’s what you may not have realised: putting the money you earn in the bank will not really help you earn more money. In fact, over the past few years, the interest rates offered by banks and building societies have sunk to levels that are lower than low.
At absolute best, your hard-earned money will retain its value when you keep it in the bank. This probably doesn’t sound like such good news. Especially when you realise that it means there’s a very real possibility you’ll actually come out behind. Although you earn a small amount of interest, the fees, taxes, charges and costs associated may actually exceed the amount you earn.
In theory, you would be better off keeping your money in your wallet, in the biscuit tin or under a mattress. Of course, neither a bank nor a biscuit tin will eventually deliver more money, financial security or a huge retirement fund.
And while your money is busy doing nothing, you’ll be stuck in traffic jams, on overcrowded trains and dealing with annoying customers, colleagues and bosses.
Make your money work for you
The alternative to all this is to invest. Investing doesn’t just mean the stock market. When you invest, you put your money into something that is expected to increase in value over time. An investment could be as simple as purchasing anything from artwork and first edition books to antique sports cars or, of course, different stocks, bonds, mutual funds, options, futures and property.
It could even be a combination of all these. As long as your investment increases in value, your money is working for you and preparing to make life easier for you.
What investing can help you to achieve
There’s very little point in investing if you don’t have a reason for it. So, before you start investing, it’s important to think about what you want to achieve.
Do you want your investments to provide extra income while you’re working? Or are you more interested in early retirement? Perhaps you have your heart set on a shiny new toy? You could be planning to start a family. Or maybe you would like to purchase a house sometime in the future …
We look at investment objectives in more detail in Chapter 5. Right now, it’s perhaps best to take a quick look at the different approaches to investing.
2.2 Self-directed Investing
Do it yourself
You could see self-directed investing as the do-it-yourself form of investing. You make your own decisions about your investments. You decide what you invest in. You decide how much you invest. And you decide when you do it.
Why wouldn’t you invest this way? After all, it’s your money that you’re investing. It only makes sense for you to decide how you do it. And, as a self-directed investor, you invest your finances in a manner that makes you feel comfortable and helps you to pursue your personal investment objectives. You’re always in complete control.
This does mean you’ll want to know a little bit more about what you’re doing. And that is the exact reason why we have written this guide for you: to help you learn what you need to know and make your way to self-directed investment success!
Why self-direct your investments?
There are plenty of reasons why self-directed investors choose the independent path:
- They want to avoid the fees charged by financial advisors.
- They simply don’t have access to quality services.
- They have suffered financially after following the advice of financial advisors.
- They enjoy controlling and investing their own money.
- They are looking for a challenge.
You may have a different reason. And that’s fine. At the end of the day, we believe you should only self-direct your investments if it interests you. And it doesn’t need to interest you for the entire period you’ll be investing. Remember: you’re welcome to start and finish at any time it suits you.
Is there any risk in self-directed investing?
Definitely. There’s risk in any form of investment. Realistically, even in the very best investment scenarios, you’ll lose money at one point or another. And not just as a self-directed investor.
Every investor, financial advisor and broker watches their investments go up and down. This includes those really clever ones who do it professionally. It makes no difference how much you pay them. It doesn’t matter how good their records are. They have to take the downs with the ups. As you’ll have to as a self-directed investor.
Of course, when you do self-direct your investments, you’ll also have the opportunity to pursue and achieve your investment goals.
Is self-directed investing the right approach for you?
Be honest. Are you interested in personal finances? Or do you just close your eyes and hope nothing goes wrong with your hard-earned savings? Does the financial news interest you? Or does it just get in the way as you look up the sports report?
If you’re not interested in finance, not even your own finances, it’s not a good idea to become a self-directed investor. And if you are interested in finance? Great! Beyond this? You don’t need to be an investment guru, you don’t need to crunch long lists of numbers using impossibly complex mathematical formulas, nor do you need to have a crystal ball to tell you what will be happening in the future. But you will want to know what you’re doing.
2.3 Investing With External Experts
This guide is aimed at self-directed investors. However, when it comes to investing, it’s always a good idea to know what else is on offer. As such, we have outlined a few other methods of investing, as well as their pros and cons.
The pros and cons of traders
What’s a trader? Basically, a person or organisation that buys and sells commodities, stocks and securities on behalf of a portfolio manager. In the old days, when you wanted to invest, you basically needed to have access to a trader. You contacted your trader over the phone or spoke to them in person whenever you wanted to buy or sell. It really wasn’t very efficient. But it was costly.
Nowadays, most traders work online. This means it’s much faster to make exchanges. And it costs much less. Perfect! But only if you know exactly what you’re doing.
Because an online trader won’t give you any advice. There’s nothing to tell you whether the investment you’re about to make is a wise one. If you’ve done your homework? Awesome. You’ll appreciate having full control of your investments and the flexibility to choose to invest in anything you want.
But if you haven’t had time to do extensive research and don’t have insight into the investments you’re making, there’s a very good chance you’ll lose out. Especially since online traders usually charge transaction-based fees, currency-exchange fees and sometimes even include fees from margin trading.
The pros and cons of stockbrokers
A stockbroker will give you advice on different investments. This may be a huge benefit. But it could also have its downsides. Brokers are also sales agents. They could be performing on their own behalf, or representing brokerage firms, but they usually make commissions for selling stock.
Although they might advise you to invest in a specific stock, security or capital, this could be because it is more in their interests than in your own.
The pros and cons of robo-advisors
A robo-advisor gives you advice. Best of all? It’s completely unbiased advice. Wonderful! This advice is automated and algorithm-based. In other words? Computers do the thinking. They look at your investment goals and your risk profile, analyse scores of information and then create investment portfolios for you to put your money into. This sounds pretty complicated. But you’ll easily be able to find a user-friendly robo-advisor.
Robo-advisors provide plenty of blogs on asset management and the strategy being taken by the robo-advisor. Great for improving your knowledge of the investment world! Now for the really good news: fees are usually based on the assets being managed. You’ll typically pay 0.15% to 0.80% of the total amount you invest. This is definitely something to smile about!
But before you do, it’s time for the downside: you can’t change what a robo-advisor puts into an investment portfolio. In other words, you’ll lose some of the control that you have with a regular online broker.
The pros and cons of financial advisors
A financial advisor gives you face-to-face advice. It’s a financial advisor’s job to help you build an investment strategy that’s based on your objectives and your financial circumstances. Millions of people rely on them. Which is perfectly fine. They know what they’re doing and are there to give a hand to people who might not.
There are certain downsides if you turn to a financial advisor. One of these is the cost. They usually work on fees equivalent to 1.0% to 1.5% of your capital. This certainly isn’t too bad. However, it’s also possible that your financial advisor will have a minimum investment requirement. And 1.0% to 1.5% of this amount will be disappearing straight away; it’s a lot of money for advice, especially since there’s no guarantee of succeeding with this advice.
Worst of all, it’s not uncommon for advisors to have an agenda to promote certain products or stocks. You may play along, purchase these products or stocks, put your money where they tell you to, only to discover you’re being excluded from services offered to premium clients.
This means you’re being given advice, just not the best advice they have! In other words, you’re paying for second-rate advice. Where’s the point in that?
The pros and cons of asset managers
An asset manager is there to offer you a service. Put your capital within a fund or with the asset manager directly, and the asset manager will use it to achieve the best possible returns. Or to try to achieve the best possible returns.
Asset managers research different investment opportunities, look at the risks, the returns, the forecasts, the industry developments, the political and social influences and several other factors to decide where you’ll find the best possible returns. This saves you plenty of time.
And they know a lot about the different industries in which they specialise. You may think this would make them reliable in their forecasts. It’s not always the case. Make sure you examine the fees, the costs and any promises made by an asset manager before you sign up.
There are different costs, fees, commissions and of course, taxes, associated with different types of investments. We look at these in increasing detail in every chapter of this guide. For now, it’s important to remember that different types of investments have different costs and fees attached to them. Make sure you don’t forget about them!
2.4 How Much Money Do You Need To Invest?
It’s important to ask yourself a few questions before you put money aside as investment capital. Is the amount of money you need to invest an amount you’ll comfortably live without? What amount would enable you to achieve your goals and live happily in the meantime? A bigger investment could help you to reach those goals more quickly. But is this the best strategy for you?
Is a bigger investment a better investment?
Think about why you’re investing. Is it for comfort? For financial security? There’s no point giving up either of these now in the hope of achieving them later in life. Whatever your investment, make sure you’ll be comfortable and financially secure in the time before it matures.
It’s true that a bigger investment might lead to a greater return. But it could also lead to a greater loss. What would happen if you invested every spare cent you have? Would you be able to overcome unexpected expenses such as a leaky roof, ugly hospital bills or the possible loss of your job? Also, take the possibility of a market downturn into consideration. Invest everything and you’ll live in constant fear!
The high figures
If you look around on the internet and talk to different brokers and financial advisors, you’ll hear plenty of different figures. There are various funds that will ask you to hand over $25,000 when you start investing with them. And for a really good fund with proven results, an excellent reputation and high returns, you’ll probably need to put considerably more on the table before they even acknowledge your existence …
The low figures
In reality, it’s possible to work with small amounts of money. Invest them where you’re comfortable investing them. Working with small amounts of money allows you to spread your investments out. This is called diversifying. It reduces risk. And it allows you to step back and leave your money to grow over a long period of time. Enjoy yourself while your money works for you.
Think carefully about this. You aren’t obliged to invest on only one occasion. There’s nothing stopping you from making new investments every month, every six months, yearly or even every few years over the entire period you’re planning on keeping your money invested. And the amounts of capital you invest on these occasions don’t need to be super-large either. Of course, if you keep making these small investments over the years, the total amount of capital you’ve invested will end up being quite sizeable.
A few doors may be closed to you if you don’t have a huge amount of investment collateral. But would you go through those doors if you did have the money? You might find these doors are permanently closed to you as a self-directed investor anyway.
A comfortable investment
It’s up to you to decide on what the right amount to invest is. And, once again, if you don’t feel comfortable investing a certain amount, don’t invest it.
You may be supremely confident about one investment opportunity and feel comfortable investing a large amount of capital. If it offers high returns with low risks? Go for it!
You may still have a few doubts about the other option you’re looking at. It seems to have greater risks. You’ll possibly give yourself a lower limit for that investment. You may decide not to invest in it at all. It’s always up to you. It all depends on what we call risk tolerance. We will take a deeper look at risk tolerance in Chapter 4. Besides risks and potential returns, there’s another factor you’ll need to look at: time.
2.5 How Much Time Does Investing Take?
You could make an investment in just a few seconds. But this won’t necessarily be all the time it costs you. You might find yourself awake at night, wondering whether you’ve looked into all the risks and returns … You might find yourself stressing about whether the person you’ve entrusted to take care of your investments for you is as reliable as you hoped.
What to expect when you’re a self-directed investor
It’s best to have some idea of what will happen before you invest. Especially when you’re a self-directed investor. You probably expect that this will mean doing plenty of homework, researching scores of investments from A to Z and then considering all the various risk factors that could influence them, now and in the future, while also calling up the histories of these different potential investments …
You’re welcome to do all this. But it won’t take as long as what it once did. There are also smart tools and investment strategies that cut the time needed for research and still give you the information you need. There are also different types of investments and investing strategies that further reduce the time. You’ll be introduced to them throughout this guide.
Reaching your investment objectives
The other side to the time factor is based on how long it will take for you to reach your objectives. This all depends on:
- What you want to achieve with your investments
- The type of investment you make
- How well your investments perform
Even once you’ve reached your objectives, you may realise there are other benefits to leaving your capital invested rather than withdrawing it all at once. We examine those in Chapter 8 about investment management.
Is youth wasted on the young?
There’s a benefit to investing over long periods of time. It allows you to make higher-risk investments that offer higher returns. You’ll have time to bounce back if anything goes wrong. And if you do achieve high returns, you’ll find yourself a step ahead of where you expected to be.
The other benefit of building your nest egg over time is that you’ll be able to truly benefit from compound interest (which we look at in Chapter 5 about defining your investment objectives). It may not look very beneficial when you start down this path, but it is sure to pay off over time.
Ups and downs
When you invest wisely, you’ll most likely come out ahead in the long run. But in the meantime, you’ll have ups and downs. Every market has its ups and downs. Every asset you invest in will have its ups and downs. But, if you keep your investments in place, based on maths and experience, you’ll still come out ahead of where you went in.
In other words? Remember that you’re investing for the long term. In the next few chapters, you’ll learn how to minimise the effects of downturns by avoiding unnecessary risk and diversifying your investment portfolio. Would you like to find out how? Keep reading.
2.6 Additional Reading
This guide is for educational purposes only, and should not be seen as financial advice.
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