Part 8: Start Investing

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Investing some money in the stock market can be a great way to get your finances working for you long term, as you work towards building a portfolio to supply you without another income stream. If you’ve never invested before, this might sound like a scary new thing to learn, but these days you can invest in low-risk investments with even just small amounts of money, so as long as you only put in money you don’t need (and not your entire savings), investing MIGHT be an adequate way to build up your assets and net worth further.

Part 8: Start Investing

Generally speaking, there are two types of investments that make up most of the stock market: stocks and bonds. Stocks or shares represent a small part of the company. Whoever owns shares of a company essentially owns part of that company. Shares give shareholders dividend payments at specific intervals (for example yearly or biannually) based on profit results.

Bonds on the contrary represent loans taken out by a company. If you buy a bond you essentially lend money to a company. Throughout the lifespan of the bond you will be paid interest and at the end of it you will be returned the original amount of money that the bond was issued for.

Both stocks and bonds might with time go up in value, meaning that if you decided to sell these assets you could make a bit of money. Unfortunately the opposite might also be the case: they could go down in value in which case if you had to sell them after their value has gone down, you would lose money.

When it comes to investing your money in the market, there are three main ways of doing so:

  • You can pick and choose your own stocks and bonds to invest in. Handpicking your own investments gives you a lot of flexibility and means you’re in (almost) complete control of the process: which company to invest in, when to buy and when to sell. It does of course mean you need some knowledge as to how to make these decisions.
  • A second option is to invest in mutual funds where a fund manager makes all of those decisions for you. Mutual funds often have high associated costs and fees however and therefore aren’t always the most efficient way to make money on the market.
  • A third way to invest is via index funds which is a way to proportionally invest in all the companies of a specific index. This type of investing doesn’t require you to have specific knowledge and often has very low costs. 

None of the above options are without risk: investments can always go down in value and whilst you can make money on the stock market, it is just as easy to lose money.  That said, as long as you take calculated risks and invest in relatively safe investments, putting money into the market can be good opportunity to. build your wealth.

It’s worth finding some time today to check out the investing options that might be available to you, what their minimum monthly required contributions are and what their fees or costs are. This gives you a much better idea of what investing might look like to you.

Lastly, before ending this quick intro into investing, let’s look at an investing guideline that has become known as the 4% rule. This rule is based on extensive research done by Trinity University where researchers found that if you have an investment portfolio of a certain value, and take out no more than 4% annually, your portfolio will nearly always sustain itself due to market increases, meaning the increase in value balances out the money you take out. Practically speaking this means that if your investments are worth $60,000, you can take out $2.400 each year without your portfolio going down in value. Or if you build a portfolio worth $500,000, you can take out $20,000 each year! That might even be enough to live off without needing any further income? Unfortunately, whilst the 4% rule is a great initial guideline, it doesn’t always hold up, especially not in times of a recession, so before you think all you need to do is invest and then live off the proceeds, you’ll likely need a contingency plan for when there is an economic downfall scenario.

Investing can be a great way to build and maintain your wealth, but it is also complex and there can be great risks involved. This blogpost is just an introduction to the topic. Before you go off and invest all of your savings, please make sure to educate yourself further with blogs, books and / or podcasts on this so that you don’t take any unnecessary and irresponsible risks. 

The above is an adaptation of part 8 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 9 of the Journey to Financial Independence!

Day 22 / 31 Discover the 3 Ways to Invest

Day 22: Discover the 3 Ways to Invest

Day 22: Discover the 3 Ways to Invest
Day 22: Discover the 3 Ways to Invest

There are generally three different ways to invest in a stock market and today you’ll find out about the advantages and disadvantages of each approach.

Handpicking shares

Firstly you can handpick your own shares, meaning you select one or a few companies you want to invest in, buy their shares and wait for the magic to happen. The key advantages as well as disadvantages are summarised below. Continue reading “Day 22 / 31 Discover the 3 Ways to Invest”

Step 52: Investing through Index Funds / ETFs

Step 52 of the 100 steps to Financial Independence: Investing through Index Funds
Step 52: Investing through Index Funds

It is now time for an introduction to the third main way of investing. As you were able to appreciate in step 50 on handpicking stocks and step 51 on mutual / collective funds, both ways have some very strong advantages, most notably the possibility of making lots of money on the stock market. Yet the opposite unfortunately is also the case and rather more likely than the first scenario… As we’ll see below, the third way of investing aims to find a middle ground between making money on the market and avoiding losses.

Index investing – an overview

Imagine looking at a long list of all the stocks and shares in a particular market – an index (such as the S&P 500) – and buying shares of every single company in that index in the same proportion as their relative size in the market. By buying all the shares of all the companies in the index, you basically copy the market and therefore will almost exactly get the same returns as the market average.  (It will normally be just a fraction below due to the small fees you pay). If the index goes up by 8% your return will be around 7.8%, if it goes up by 13% your returns will be around 12.8% etc. That’s what index investing does. Sounds simple and indeed it is simple.

Of course as a small investor you’ll never have enough money to buy shares of all the companies in the index, which is why index investing – like with mutual funds – pools money of different investors together in order to increase buying power. Continue reading “Step 52: Investing through Index Funds / ETFs”

Step 51: Investing through Mutual Funds

Step 51 of the 100 steps mission to financial independence: Investing through Mutual Funds
Step 51: Investing through Mutual Funds

In the previous step we looked at the advantages and challenges of choosing the shares and bonds to invest in yourself. In this new step we look at an alternative which is designed to help you if you don’t want to choose your own investments, but rather rely on the opinion and experience of somebody else: Investing through collective or mutual funds.

As we’ll see, this type of investing has its own major positives and drawbacks so let’s get started with the details.

Mutual funds – an overview
In the case of collective or mutual funds, the money of small investors in pooled together in order to raise the total amount available to invest. A fund manager is appointed to manage these funds and he or she decides which shares and bonds to add to the portfolio, trying to make as much money as possible. This often means they buy and sell continuously, following the market, aiming to buy shares at a low price, sell them at a high price and rush selling if they see a fall in the market coming, to avoid their clients losing a lot of money. Sounds like a good tactic? On paper yes, but in reality there are two main problems with this type of investing. Continue reading “Step 51: Investing through Mutual Funds”