How to Get Started with Investing
Hey Ali. I've stolen this article from your Youtube video entitled How to Get Started with Investing. I have "converted" one of your videos into a blog post to show you (as opposed to 'telling you') why I would be a great writer for your online business. I have tried to adopt your voice too.
How to Get Started with Investing
Sometimes we ramble. If you are really in a rush, the "Steps to Start" section will give you the essentials of good investing in about 30 seconds of reading. If you want a little more info before investing your life savings, then read on.
Steps to Start - Yes, it really is this easy
To get you started on your journey to financial freedom, I'm going to lay out what you need to do today and tomorrow to get started.
Day 1 – Open an account with an investment platform/online broker.
Try Vanguard or Fidelity. Simply find them on Google and open an account. Otherwise, find a low-cost investment platform available where you live.
Buy an S&P 500 ETF with some of your savings (start with a max of 50% of your savings if you are under 30, and less if you are older)
Set up automated payments to come out of your bank account each month (you can start small and build up as you become more confident)
Day 2+ – Explore other investments you might like to make (make sure they are diversified and cheap, and remember not to sell, unless you really, really need the cash)
Start exploring different types of investments that suit your goals
Increase the amount you invest as much as you can
Start saving more on things you don’t really need
If you need a little more info, let's get into the juicy stuff here. Don't forget to come back to this list at the end to get started on your path to financial security/freedom/whatever you want to call it.
The Juicy Stuff
Investing can be a tricky business. There are so many jargony words that get thrown around. Maybe you’ve read a little about investing and you came across words like “index funds”, “dividends” or “S&P 500”. To make matters more confusing, we often get told by parents or aunts and uncles that investing is risky.
“Oooh no” they might say, “don’t go gambling with your hard-earned money. Best to stick with a bank. Even better, have you thought about chucking a safe under your mattress?”
Sorry gramps, I know you mean well, but that isn’t great advice. If you want to be financially free, pursue your dreams and choose your own path in life, you need to invest. Most people just can’t earn enough to allow them to retire early or quit their job.
So, what should you do with your money? I have spent a good couple of years trying to figure out the answer to that question. This article is the one I wish I had 5 years ago. In it, I’m going to show you:
1. That investing is not as risky as you may think
2. That you should get started today, no matter how much you have
3. How to decide which investments to buy, no matter where you are
4. How to get started with a few easy steps
Is investing really all that risky?
Investing really isn’t as risky as people think. Sure, if you invest in one stock, say Blockbuster before it closed the last of its stores in 2013, you could lose everything, and nobody wants to lose all their hard-earned money! That would totally suck, I get it. Luckily, that risk is very small if you invest in a lot of companies at once. This is what the investing guru’s call ‘diversification’, and it makes losing everything extremely unlikely (I’ll show you how to do this a bit later).
It is possible that one company, Apple or Microsoft or Amazon, say, go bankrupt. But what are the chances that the 500 biggest companies in the United States all go bankrupt at the same time? If that were to happen, we would all have bigger problems that our investments. We would be stealing canned food from grocery shops and building doomsday bunkers instead.
The other point to note is this. You only really lose money if you sell a thing for less than you bought it for. If I buy a house today for $200,000, and a global pandemic breaks out and nobody wants to buy the house, the value might be a lot less, say $150,000. So, I am losing $50,000, right? Well, only if I sell it at the current market price today, which I would only do if I were desperate. If I waited 10 years, it is more likely to recover, and I might even get more than I paid. The lesson here is that investments tend to go up in the long run. The longer I hold onto an investment, the more likely it is that it will become more valuable. Don’t buy an investment if you will need the money in the 10 years, and you can really reduce the risk that you will lose money. As one of my favourite YouTubers, Graham Stephen, likes to say: “Buy and … wait for it … hold, that’s it!”. Good investors buy shares from a lot of companies and hold onto them, for the long term.
Why Start Today?
There’s an investment saying, I don’t actually know where it comes from and I can’t be bothered to check, but it’s cool and its true:
“The best time to invest was 10 years ago. The second-best time is today.”
The longer you hold an investment, the more time you give it to compound. Compounding is a fancy way of saying your money grows faster and faster if there is more of it. The earlier you start investing, the more money you’ll have tomorrow, and the more that money will grow, and so on. Albert Einstein called compound interest the 8th wonder of the world. He was really something (it's almost as if he was a genius).
If we take the average growth of the 500 biggest companies in the United States since 2000 (about 8%) and adjust for 2% inflation, we get an approximate real return of 6% per year since 2000. If you were to invest $100,000 today and leave it there until 2060, you would have over $1,000,000 after inflation, that’s 10x what you put in, even if you never invested another cent. Past returns are not an indication of future returns, but this does illustrate the power of compounding interest over 40 years.
It is never too soon or too late to start. The earlier you start, the better. There are just 3 caveats that I need to give before you go investing like a crazed lunatic.
1. Make sure that any credit card debt is paid off first, because this debt will compound as well, and you probably pay more on your credit card debt than you can gain from investing. You definitely want to pay that off as soon as possible.
2. Set up an emergency fund. This is an accessible bank account with 3-6 months-worth of expenses in cash. You don’t want to be taking money out of your investments if a big hospital bill or something comes in.
3. Don’t invest money that you will need in 5 years or less. The value of stocks goes up and down a lot. Markets absolutely plummeted with COVID-19, but now they are higher than in January 2020. So you don’t want to be forced into pulling out money in the short term. If you have a child on the way, or university is coming up, don’t use this money to invest. Investing should be for money you may need in retirement, or for a house in 15 years’ time or stuff like that. Only invest money you will need in 10 years’ time or so, and you should be good to go.
What Investments Should I Buy?
Usually at this point, I need to say something like “this article is not investment advice, it is informational only”, whatever that means. I have checked this information with some investment advisers, though, and they agree that it is solid.
There are three things that an investment should be:
1. Easy to use
3. Low cost
There isn’t much point in recommending an investment if it is impossible to actually put money into it. So, I want to make sure that the information I am giving today is actually useful to the average guy or gal.
A diversified investment is one that doesn’t out all your eggs in one basket. By diversifying, you are investing in multiple countries, sectors and types of investments. This ensures you are at a really low risk of losing money.
The last key to successful investing is keeping costs low. There are tons of ‘advisers’ that will tell you to invest in this fund or that stock. They will charge you large fees to do so, and you should (for the most part) ignore them. There is very little good evidence that individuals can do better than the average. This is called “beating the market” and even Warren Buffet (possibly the most famous investor of all time) hasn’t managed to do it over the last 10 years. Check out this article if you want to know why. With this in mind, your best bet is going to be to find a low-cost investing platform and then buy a low-cost index fund or two.
I hear you, “Ali! You’ve become what you swore to destroy! What do you mean with these fancy, confusing words?!” Let me explain.
An investing platform is a company that will allow you to buy investments. They are online stockbrokers. Companies like Vanguard offer this service. Different platforms charge different fees for buying or selling investments, so you want to find one charging very low fees, somewhere between 0% and 0.5% of your total investment per year.
Then, once you have access to a platform, you can actually buy your investments. These should be diversified and cheap. They are usually listed as “exchange traded funds (ETF)”. This simply means they are funds – a fund is a collection of different stocks – that can be traded on the stock markets as if they were stocks. In other words, they can be bought and sold cheaply and easily. The best ETFs for young investors are ETFs that track the S&P500 (really low ongoing costs, about 0.07% of your investment per year) and maybe a global fund tracking global markets like the FTSE Global All Cap Index (fairly expensive at 0.23% per year, but globally diversified).
Remember that the longer you can hold onto your investments, the more you can own in stocks. As you get older, you might want to start selling some stocks and invest in bonds (they are safer, but they get lower returns) or keep some extra cash in a low-interest savings account.
In the UK, some of the best investment platforms include:
Nutmeg (if you want someone to choose which investments you should buy and don’t want to DIY it)
To open an account, you need a National Insurance number and a debit card with a related bank account. If you live in the UK you usually get a National Insurance number at 16. Otherwise, you can apply for one. Just google, “apply for National Insurance number UK” and use the advice on the Gov.uk website.
In the United States, the best platforms include:
Betterment (if you want someone to choose which investments you should buy and don’t want to DIY it)
To open an account in the U.S., you’ll need a Social Security number, a U.S. home address and provide some other details.
For now, that's pretty much it. I'll be posting regular content elaborating on some of these things and giving you more details. For now though, go open an account and in 10 minutes you could be on your way to financial freedom!