Investing for beginners – how to get started
Everyone has aspirations that need financing. Whether it is for a down payment for a new house, a BMW or the next holiday trip, we all need savings.
Most of the people start by putting aside a certain amount of cash every month into a bank savings account until we have reached a considerable amount of cash, also called emergency pot. As a reference, this pot should cover six months of our living expenses (rent or mortgage, food, car loans, etc). Is after that, when we think about investing and how to make our money work better for us.
Back in the 80s, when interest rates were a double figure, all you had to do was to keep piling up cash into your savings account. Nowadays, we hardly find accounts returning more than 1% annual interest in most of the countries. Someone saving 100 Euros a month into a cash account, paying just 1% interest, would earn 12.622 Euros over 10 years, being 622 Euros the accumulated interest. It would only take 248 years to reach a million! LOL
If we could find an investment that would return 7% yearly, we would generate a bigger pot of 17.201 Euros and need 61 years for a million. That sounds better!
Another important fact to consider is inflation, which was 1.75% as average in Europe in 2018. Those holding a 1% interest account lost -0.75% purchase power over a 12 months period. This fact triggers people interest in investing and overcoming inflation growth.
The world of investments can seem complicated and scary, with some people believing that only the rich can fiddle with the stock market. That is completely wrong. Anyone can start investing with only 10 Euros.
The first thing to do is to think about your goals. What would be the purpose of investing and what would you use the money for? How much money would you need to archive your goals? What is your timescale or period you want to invest for?
After answering these questions, you need to find your risk tolerance. Are you comfortable to see the value of your investments go up or down over your timescale? Are you close to retirement and rather have a passive income stream?
Take this online survey to find out your risk tolerance score:
Next, you need to determine what type of investments match with your risk tolerance, while delivering the returns you would expect to archive your financial goal. There are several types of investments and asset classes, such as shares, bonds, property or commodities, and different ways to get access
Setting the first steps up consciously is very important, as you don’t want to end up needing funds from your investments while the value is below the starting point.
Main types of investments
The stock market is the conventional and better-known type of investment and widely used by economist and politicians to measure the economy of countries and unions. Investors can buy and sell shares of a business. A share is simply a stake in a company, which will increase or decrease in value over time and often pay its owner a regular dividend. The owner of a share is called a shareholder.
A bond is a form of a loan to a government or company with plans to raise some money. The holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. The time period and the value of the loan are set in advance, with a specified interest rate to be paid to the creditor (investor).
Bonds aim to be a safer investment type but are less financially rewarding than stocks. Historically, stocks have outperformed bonds over long periods of time. For instance, the average annual return for the S&P500 since its inception in 1928 through 2016 is approximately 10%, against a 5-6% for long-term government bonds.
Another popular investment type is Property or Real Estate. That could be in a residential house (buy-to-let), owning commercial properties like shops, hospitals or factories and Purpose-Built Student Accommodations (PBSA). You can also buy shares in Property-related companies in a similar way you would buy shares of a company.
Commodities are basic goods or raw materials humanity uses in the daily life. Oil, coffee, natural gas, gold, wheat, cotton, sugar and silver are the most traded ones.
The various assets owned by an investor are called a portfolio.
As a rule, spreading your money between different asset classes helps lower the risk of your overall portfolio.
How to invest
Once you have decided on the type of investment you want to make, it is time to consider how you will invest. This part can be especially confusing, as the variety of choice is massive. I select the main ones I think every beginner should first know about.
Pooled funds or Mutual funds are a pool of your money with that of other investors. A professional manager will use this money to purchase a large number of assets according to their expertise and current market conditions. They will also review the investments to make sure they are doing well and change them if necessary. There are high costs and fees involved in investing in funds, making them less attractive for investors, considering that only 5% of mutual funds beat the market for a consecutive period of three years.
Low-cost Index funds are a type of mutual fund designed to match the performance of one of the major stock or bond indices (S&P 500, Dow Jones Industrial Average, FTSE 100, Global Bond, etc.). In this case, the funds are passively managed, lowering its fees while also performing better than actively managed funds on a long-term orientation. Successful investor Warren Buffet recommends to ordinary investors the use of low-cost Index Funds.
Exchange-Traded-Funds or commonly known as ETF is another pooled investment vehicle. Like a mutual fund, an ETF offers investors a proportionate share in a pool of stocks, bonds, property and other assets.
Unlike a mutual fund whose shares are priced daily based on the value of its assets, an ETF can be bought or sold throughout the day on a stock exchange at a market-determined price.
They can also be used to track individual stocks and shares, indices such as the S&P 500, commodities and bonds – and typically come with low charges too.
Crowdlending or Peer-to-Peer Lending (P2P) is a way for people to lend money to individuals or businesses through an intermediary platform. The principle behind crowdlending is to source a loan from a ‘crowd’ of many investors, each contributing a small proportion of the overall amount. By committing only small amounts to anyone loan, investors can spread their overall risk.
This type of investment is growing fast in popularity because of its simplicity to invest. The range of interest returns can vary from 8 to 20%. There are several platforms in Europe available for investors. Here are some of those that I use, and I am happy with: Mintos, Grupeer and Envestio. In some cases, these platforms offer a welcome bonus to new investors if using referral links (like the ones above).
Real Estate or Property Crowdfunding works in a similar way as P2P. If someone wants to invest in some real estate, but they don’t want to own or maintain the building, they can become a shareholder through a crowdfunding company. Then, any profits that the real estate venture sees (profits that come from rental income or selling of the property) are passed on to the investor.
Property Partner and Housers are the platforms I use to purchase shares in Property. I wrote a review of Property Partner, where I share my opinions and the returns made, after one year of investing. These two platforms also offer a bonus for new joiners if using referral links.
Some countries offer Tax-free accounts where investors won’t pay taxes on any capital gains or income. I encourage you to spend some time studying what tax advantages your country offers (if any) and take decisions accordingly. Taxes compound negatively in your portfolio over the years and can’t make a huge difference in your numbers over a long period of time.
I am neither a professional investor nor a financial advisor. Investing is a passion of mine and I am only writing about it as a hobby and learning purposes. I wish and hope the information written here can be useful to you, but I would encourage you to seek professional advice before making any big decision. You can read more about me and this site here.
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My risk tolerance score is 30, above average. Did you also take the survey? What was your score? I would love to hear from you, so please leave a comment down below.
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