Risk comes from not knowing what you are doing.Warren Buffet
In today’s world, wanting to invest is increasing in popularity, especially with the younger generations. Personally I am very passionate about investing and I do not believe in the old narrative of putting your money in a savings account. Nowadays a savings account will get you less than 0.5% interest a year and there are even banks that stopped paying interest altogether. In this article I want to share a few basic, but very key reminders for those that consider investing, but are new to the concept of it.
As I said, in this article I want to talk about the very basics which you need to know if you want to contribute money to make money. Let’s call it the “preparation”, which happens beforehand. The preparation will include things like mindset, due diligence, investing platform and entry point.
The preparation is of great importance, due to the fact that investing does not come without any risk. Therefore it is crucial to realize that the preparation will cost time. If it was easy and completely risk-free, everyone would be doing it. Now, let’s go over the basics.
An investor’s mindset
The first basic would be mindset. Investing requires a certain way of thinking. My favorite phrase when it comes to investing is “Buy the fear, sell the greed”. In other words: buy at a low, sell at a high, which is generally the complete opposite of what the masses are doing.
You see, most people are just looking for the next hot thing; meaning they will invest in whatever stock has spiked tremendously in the past week, month or half a year. They end up ‘buying the greed’. But there are two problems when it comes to buying the greed.
The first is that you missed out on the growth which potentially could have increased your profits and thus, your ROI (Return on Investment) won’t be as much as it could have been if only you had entered the market at an earlier stage.
The second problem is that, after a stock has jumped, there is a great possibility that the stock will go back down. This happens because people who did enter the market early, will sell their position to secure their profits. This might result in you losing money. Therefore you should always “buy the fear, sell the greed”.
In addition to buying the fear, you should always aim for the long-term and therefore only provide with money you do not need now or anywhere in the (near) future. To amplify this thought; treat the money as if it were already lost. By looking at it this way, it will also be easier for you to determine how much you would want and would be able to contribute. How much can you afford to lose? There is no specific amount everyone should invest and the size of your expense is completely up to you. Just take into account that certain investing platforms do require a minimum amount.
The next thing I want to touch upon when it comes to mindset are your emotions. In my opinion, investing requires a thick skin, but at the same time one should act as a sponge and be able to take in all the information available to you as the information might contain clues and can play a role in your decision making.
If you find yourself in an environment that has a negative attitude toward spending money on assets, a thick skin will be most helpful. These days everyone has their opinions, but the only opinions you should listen to are those of people that have the knowledge and the experience needed in this industry.
Your thick skin should also help against the fear and panic that sometimes can play its part. Sometimes an asset can be volatile and doesn’t always go straight up. There will be days that it will go down, but don’t let this scare you and think you should sell your position. Personally I think you should not even be looking at your portfolio on a day-to-day basis. Remember, it is long-term. You most likely won’t make a profit within the first few weeks, if not months.
Lastly, surround yourself with like-minded people. I would recommend you to create a group chat with people that are eager to invest, just like you. The group chat should be a tool in establishing your next asset. In the chat, you should be able to discuss possible investments with others. The biggest benefit is that you will have an extra pair of eyes or two look at the same asset and they might encounter a determining factor which you might have overlooked. I recently did the same thing: I created a group chat with a couple of peers from my Accounting course. I find it to be a great way of learning.
Do your due diligence
Looking into an investment more closely and doing your research is one of the most important, if not the most important part of it all. Knowing what you are getting yourself into will guard you from making haste or emotional based decisions, and it will aid in risk management. There will always be risk involved regarding investing, but how much risk you will be exposed to is up to you. Managing risk can be done by doing your due diligence thoroughly.
The information you should be looking into depends on the type of investment, but knowing who you will be investing with or what industry you will get involved with would be a factor in probably most investments. Some examples could be the reputation or financial performance of the bank or company you are looking into, or the sustainability of an industry. You would want to know if the institution, company or industry is gonna be around for much longer. Remember, think long-term.
Maybe you already know how to start, but aren’t sure where to start. For a couple of investments you can go directly to your bank or to a broker. Personally I would not invest with a bank because most of the time, the assets they offer are not aggressive enough and might not even compete with today’s average inflation, which I have learnt is to be about 3,5%. Hence, your money will still decrease in value over time.
If you feel like you do not have the time nor the energy to do a detailed research, you can have a broker do it for you instead. Usually a broker calls for a fee or commission to be paid for their services. The downside to this is that the commissions which a broker earns are form their salary and therefore they depend on investors to spend their money on assets.
The commissions are usually paid over the investment made, so beware of brokers that advise you to move your fund more often than needed only so they can put more money into their own pocket. I know that there are rules in place to protect against this type of ‘fraud’, but you should still be careful.
Of course there are also good brokers out there, you just have to find the diamonds in the rough. When choosing a broker, make sure you are choosing someone who has his own investments as well and actually knows the drill; someone who puts his money where his mouth is. Also find someone who takes the time to educate you and answers your questions.
But luckily with the technology available, there are tools that allow us to invest in a safe way, just right here on the internet. Because of these tools, there is no need for a third party to get involved and you will have full control over your money. Though there are multiple websites and apps that support investing, three examples would be eToro, VantageFX and Vanguard.
Now in all honesty, I am not too familiar with Vanguard, so I will not go into much detail here. All I know is that it is widely used and displays a variety of instruments, including retirement plans. Personally I use both eToro and VantageFX. What I like about these is that both platforms offer the possibility of opening up a demo account for you to try and practice, before diving right into it.
However, if I had to choose I would prefer eToro. When going through investing options, eToro has more information available, which can help you in your decision making. I also find eToro incredibly easy to use and it keeps a clear overview. Just remember that with both platforms you do not own anything. I rather think of it as betting on an asset rather than owning one.
Whatever platform you want to use is all up to you and the preference can be different for each person.
Choose an entry point
An entry point can be defining for your ROI, and it relates back to the phrase “buy the fear, sell the greed”. Generally a low entry point is better than a high entry point.
In recent lights of the corona crisis, many companies have reached an all time low, and therefore many opportunities are available in the stock market right now. Although there is a lot of uncertainty going around globally at the moment, better times will follow. Just like when there is rain before sunshine.
Pinpointing a great entry point can be difficult, but using the history of a particular asset can always provide you with clues. Just remember not to buy a “hot tip”, because generally that would mean you are too late to the party.
Find a mentor
If you are still very uncertain about it all, even after going through some of the aforementioned steps, I would recommend to find a mentor. Actually, even if you are certain, but still have lots to learn, you should find a mentor.
A mentor is someone who has what you have or who knows what you want to learn. A mentor is someone who has walked the path you are about to take. The advantages of having a mentor is that they can teach you from experience, which also means they can tell you about the mistakes they have made. Learning from a mentor can provide a tremendous amount of value.
Overall investing requires a lot of time and effort, especially if one wishes to decrease the amount of risk they expose themselves to. Remember that investing should be done carefully at all times and with excess cash, meaning, cash that is not intended for any other purposes. This way you can guard yourself from finding yourself in financial problems.
Lots of love,
In this article I merely give my opinion and share personal experiences. This article does not present any advises related to investing or any other monetary activities. If you choose to invest, it will always be your own responsibility.