How to Start Investing?
If you are just starting out, it can all get a bit overwhelming.
Below is my personal view on how to best learn how to invest, get passive income but also invest in Stocks where you have strong convictions as we all may have some edge in a certain field
THE ELEPHANT IN THE ROOM
Stock Picking is fun but it's a loser's game
You want to pick stocks; you want to invest in the technology sector because you work in the technology sector. You want that dividend stock that you think will do well. You want Tesla or jump of the latest trade from El Presidente (that said he still only gambles with 5% of his net worth!)
Even among some of the smartest Retail Investors within Bogleheads and FIRE Community some are taking a gamble from time to time.
Even Pros are addicted to it
Worse, most professional Investors including the most prestigious ones I worked for like to gamble with their personal savings and ignore the financial theory. You could argue all active management is gambling but while this makes sense to make overall markets efficient there is also a reason why passive investments are so successful – they just win in the long run.
My Golden Rule - Keep at least 90% of savings in Proven Index Investments and 'gamble' with the rest
While Passive Investments work active bets keep me excited when I log into by Broker account and that’s just human nature. We need a bit of thrill.
Up all night to get lucky
“It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.”
Most people simply ignore all the work that active Investing (aka Stock Picking) requires. There is a whole process behind it you can see below. There are millions of people doing it on a daily basis some much smarter and with better technology than most and still can’t beat the indices (because luck plays a bigger role that many want to acknowledge)
Below is part of the answer but most Investors still stay up all night to get lucky
What could (possibly) go wrong?
OK, BUT WHAT ABOUT YOUR 90% ?
I essentially follow 3 simple rules, that are easy on paper but hard to implement for people looking for instant gratification
#1 I don't allow myself to lose the 90%
Exponential consequences of losses (Never lose money!)
#2 I let time be my biggest Ally
One reason why Buy & Hold pays off (and Warren Buffett keeps winning)
Einstein famously said compound interest is the 8th wonder of the world. You understand that people who bet on single name stocks won't be able to outperform in the long term. They may also quickly lose money. As a result they are incurring a massive opportunity cost. Einstein concluded: "He who understands it, earns it … he who doesn’t … pays it"
Buffett's first rule is based on that concept. "My wealth has come from a combination of living in America, some lucky genes, and compound interest."
#3 I focus only on things that are in my control
Why do most people fail at investing? (You can't time the market!)
Buy and Hold is probably the toughest investing strategy. Emotions always want to take control. Investors (sophisticated or regular savers) think they can time the market.
Th below graph is a sobering reminder of the potential costs of market timing. By missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolios with devastating results. Six of the 10 best days occurred within two weeks of the 10 worst days. This study shows that over 20 years, the average investor has achieved a 1.9% annualized return as compared to over 5.5% just by staying invested in an Index Fund (before fees)
20 year annualized returns by asset class 1998 - 2018
... and waste time on things over which they have an illusion of control
- Perhaps, you follow Stoic philosophy or did meaningful research and understand there are lots of aspects in investing (and life!) you have no control over (despite what most investors think). I try not to ignore the role of randomness in markets
- Did you know that the Pareto Principle also applies to investing? What does it mean? Stock picking has almost no influence over long term returns. It’s been researched heavily and proven correct. Crucially, the decision whether you allocate 60% to Equities as a whole (e.g. S&P 500) and 40% to Bonds will matter much more than picking individual stocks (in fact, allocation to the right asset class determines over 90% of overall investing performance)
HOW DO YOU MANAGE THE 90% ?
"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."
I define my Time Horizon
When will you need your money: is it 1 year, 5 years or 10+ years?
I try to understand my Risk Tolerance
While there is not substitute to seeing how you really behave during a Stock Market Crash you can take a questionnaire to better understand yourself:
- Vanguard – Investor Questionnaire
- Merril Lynch – Risk Tolerance Evaluator
- Wells Fargo – Risk Tolerance Quiz
- Index Fund Advisors – Risk Capacity Survey
I follow the below boring process
BUT WHAT IS BANKERONWHEELS.COM ALL ABOUT?
- You know that Index Funds are the best way to get exposure to Stocks which generate passive income (excellent piece on this here).
- Index Investing works consistently over and over again. In fact, Warren Buffett instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife
- Stocks only go up. Over the long term e.g. 10+ years. However, this is not bullet proof strategy when have some risk aversion and/or when your time horizon is shorter (e.g. 5 years)
- Because of shorter time horizon I may look for Stocks Portfolio Protection
Investing in Stocks can be risky over a short and medium time horizon (look at the simulations over the past 30 years)
Objective of this Website
Bankeronwheels.com is focused on the protections you can put in place to get a smoother ride to high returns
BANKERONWHEELS.COM ASSET ALLOCATION RESOURCES
Here is some recommended reading on How to Invest Your Savings:
- I want to park my cash for a year or two – is there a simple and cost efficient way?
- I have a medium term investment horizon – how can Gold and Treasuries help to mitigate Equity Risk?
- I want to invest for the long term – should I invest in one go or over time?
- Why are fees important – understand how costs add up
- Read about the common Investing Mistakes
BANKERONWHEELS.COM BOND RESOURCES
Here is some recommended reading on Bonds:
- Do I actually need Bonds in my Portfolio? Here is a simple comparison
- But if I do invest it will be through Bond ETFs, are they actually safe?
- Treasuries are the safest Bonds but there is a trade off – yields are at their lowest – what can I expect going forward?
- Bonds can seem complicated, here is a Bond ETF guide to get started and get the full picture
- If your goal is rather income and diversification with less emphasis on protection during Equity Sell-Offs look at Corporate Bond ETFs. Here are the main ETF Funds that FED is buying now and their performance during the Coronavirus sell-off.
BANKERONWHEELS.COM GOLD RESOURCES
- Diversification with Gold works in the Long Term – Click here to understand how Gold may benefit your Portfolio (as an alternative to Treasuries)
- Click here to review what drives Gold prices and if it’s a good moment to add it to your portfolio
- As illustrated here adding a Safe Haven asset (like Gold or Bonds) can not only protect your portfolio but also increase returns
Safe Haven Assets can help - browse this Website to understand how how to Start Investing safely
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Sound principles for long term returns