Baby steps to investing for those who don't know how and where to start.
Investing is such a complex and wide topic, with everything ranging from get-quick-schemes to bitcoins to gold to the next housing market boom/crash.
Due to that, one can be tempted to:
spend forever trying to become an expert before dipping a toe into the investment waters, or
leave it to someone else to handle so you don’t have to worry your pretty head of hair over it.
Unfortunately, putting off investing, or shoving it into the hands of somebody else, are both awful ways to go about it.
Just start lah
By putting it off, you are losing out on the best factor when it comes to investing: time.
They say time heals all wounds, but what they forget is that time also makes things grow, and this includes money. You should be investing from your 20s, not when you’re turning 40 or 50.
Start solo, then get help
The easy way out is to just get a professional or your brother-in-law to completely handle your money for you, because who has time for this nonsense??
While I don’t think there is anything wrong in seeking professional help, I also think it is extremely important that you start investing on your own at first. Frankly, nobody will care about your money as much as you do, and by outsourcing it, you are basically missing out on the opportunity to learn, and are instead funding someone else to make mistakes at your expense.
Everyone is different - your priorities and timeline and income trajectory are specific to you. Because of that, you will have a different investment approach than mine or your neighbour’s.
By doing it on your own, you will:
understand your psychological mindset on making money and losing money: are you calm in the midst of an economic downturn or do you panic like a headless chicken?
understand your personal risk profile: how much risk can you handle, and at what point does this make you lose sleep at night?
understand better (if not completely) how the investment tool works, so that when you do end up handing the responsibility over to a professional, you will actually be able to tell if they are doing a good or shitty job rather than blankly nodding along to whatever they say.
Later on, once you’ve gotten a reasonable understanding of how and what you prefer to invest in, and your assets are much more sizeable than they are now, you can consider paying a professional to help you.
By this time, you will know exactly what to look for in a professional, and be able to truly tell if they know what they’re doing or if they’re just talking sweet and fast.
(Even then, I highly recommend keeping a very active finger in how your investments are being managed by the third-party - I repeat, no one will care about your money as much as you do.)
For now, pick up 2-3 books on the topic, or read the first 5 articles that come up on the Google search, and you’re good to start.
“But what if I’m so awful at it and I lose money??”
The thing about being a beginner and a learner is that you will, naturally, be awful at it in the beginning. And yes, as you’re navigating the ropes of ROIs and Sharpe ratios, you may end up losing some money.
But here’s the thing: professional investors lose money too, all the time. It’s part of the game.
But here’s another thing: you will get better, and you will know what to do, or what not to do, and what’s within your control and what’s outside your control. You will still lose money every now and then, because that’s the game, but you will also improve and know what to do to make more money.
Start with the two least complex things on the menu
Here’s the hierarchy of complexity among the different kinds of investments:
For someone who is starting out, I recommend that you first take care of the foundation: savings, emergency fund and insurance if you haven't already.
Then, for investment purposes, go for the two bolded items for starters: bonds and mutual funds - both as a launch pad to more complex investments, but also as a more-than-sufficient investment strategy if you don’t desire to get any more complicated than this.
[This means I will NOT be talking about picking individual stocks, buying real estate or other investment varieties like gold, bitcoin, etc. Some of those require fairly extensive learning and considerable capital, while others work in very specific markets or economies that are unique to it. Not the scope of this post.]
Bonds are loans you give to an organisation (typically a government entity), and in return for taking your money for an agreed number of years, they will pay you a % of the amount monthly or annually.
These tend to be the ‘safest’ investment because governments are usually stable and will hardly go bankrupt (although we know that is not necessarily true *coughGreececough*), so it is pretty much guaranteed that you will get the money as promised.
The downside to that is the low returns, that range from only 1-3%.
But hey, it’s stable, it’s relatively low-risk, and is suitable for you if you are more interested in not losing your money than in growing your money. Very very suitable if you do not have the time or the heart to withstand the ups-and-downs yo-yo effect of the other investment tools.
Mutual funds are groups of individual company stocks compiled by a fund manager. Each fund will have a theme and a set of rules on what they will and will not invest in: for example, an Agriculture Fund will have stocks of agricultural companies, while an Emerging Market Fund will have stocks of companies from the second and third world countries with an anticipated high growth rate.
The main benefit of a mutual fund is the ability to own lots of stocks and even entire industries with a little bit of money, allowing you to spread your risk as you wish.
The main drawback to a mutual fund is the fees (that can go up to 5%) (though not a major deal as you’d be dealing with brokerage fees even if you’re doing on your own anyway). You can offset this drawback by: