How to Start Investing?
Key Takeaways
- 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
- If you have experience investing and follow a similar investment philosophy I’d suggest to jump straight to the Guide section
Stock Picking - The Elephant in the room
Likelihood of picking the right stocks
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 ignore research and pick stocks
- 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
5 to 10% for Gambling
My Golden Rule - 90% of Savings in 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?
What about 90% of your wealth?
I essentially follow 3 simple rules, that are easy on paper but hard to implement for people looking for instant gratification
Rule #1 - I don't allow myself to lose the 90%
Exponential consequences of losses (Never lose money!)
Rule #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."
Rule #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 e.g. the Vanguard Investor Questionnaire
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. 15+ 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
Start your Investment Journey and earn Passive Income - Wise Investing is relatively simple!
Start by reading what Wise Money Investing is all about and how to avoid traps and then browse through my guides to understand what consistently works over time
Popular Guides
My fundamental reviews of Equity ETFs and Asset Allocation include:
- Investor Checklist - Ready to Invest? Have a look at the checklist before buying ETFs
- How to build a Long Term Portfolio for Financial Independence - Guide to creating a Smart & Simple Long Term Portfolios with ETFs
- All you need to know about International ETFs - including Developed vs Emerging Markets, Small vs Mid/Large Caps and country allocations with List of Best ETFs
- The Simplest Equity Portfolio - Comparison of Best Total World Equity Index Trackers
- How to pick the perfect ETF? - Investing in Europe is not quite the same experience as in the US but this guide will solve all your issues. Spoiler - don't use TER! (applies to US Investors as well)
- Which Assets do I need in my Portfolio? - Clean up your portfolio from assets you don't need. High Performance and low maintenance Asset Allocation Strategies
- How do I benefit from a market crash? - In the long run no crash (including Japanese style) can derail you if you do it right
- How to Invest for Short Term goals? - Medium Term Investing is more risky than long term portfolio - pay attention to the right asset classes
My fundamental reviews include:
- Spectacular Market Crashes - how much can you lose? How long will it take to recover? How to take advantage of the next recession
- What if my Broker goes Bust? How to choose a Broker that is safe
- What is the best rebalancing method? How to increase returns and reduce risk by rebalancing your portfolio
- What about currency risk? Should I hedge my Portfolio? - Hedge or not to hedge? Guide to hedging currency risk in your Equity and Bond ETFs
- Should you buy Gold? - Is it necessary to have an asset that generates no yield? What really drives Gold price?
- International and European Bond ETFS - For Long Term International Investors Bonds are key to protect their Equity Portfolios
- US Bond ETF Guide - Comprehensive Review of Blend Bond Funds, Treasuries, Corporates, High Yield, Inflation Linked, Muni ETFs
- Top 3 Corporate Bond ETFs - If you want to increase income buy these ETFs to invest alongside the FED [for US Investors only]
DISCLAIMER
All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice
Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the full disclaimer.
HAVE A QUESTION ABOUT INVESTING?
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Note that this website is non-revenue generating. In addition to time I dedicate to this, I pay for hosting and software to provide you with the analysis
Stay safe & healthy,
Raph
Sound principles for long term returns
Yes, Mike. And yet most people ignore sound principles. I think it comes down to maturity and appropriate expectations (in life and investing)
Thank you, BoW for the amazing work you have done to collate and explain financial research that we’d take years to collate, understand, and implement.
I can personally attest to the success of your recommendations, as I’ve followed the same strategy over the past decades.
For your website, I have one suggestion for investors with some experience: Read just the bolded headings. That way, you’ll get the big picture quickly. If you wish, you can then dive deeper into data by reading the paragraphs under the bolded headings.
Thank you again!
4eye – really glad you appreciate the my work. What portfolio have you had most success with?
All the best,
Raph