Studies of Life

Learning by doing.

How to Start Investing

08 November 2015 by Jim

I’ve been asked by a reader how to get started, and noticed that I haven’t yet talked about this in a general way, because most of the posts here are about specific investment strategies. So here is a more general approach for those who are still looking at how to get started.

# Starting to invest

  1. Earn more money than you spend
  2. Save the difference so you have something to invest with
  3. Invest that money

This is the first, basic set of instructions on how to begin. Before moving on, make sure these three steps are checked off on your list. It’s no use to invest when you spend every dime you earn. Never invest borrowed money!

Once you have money to invest, the next step is to find investments that are worthwhile for you. What you would like to invest in depends on your preferences in terms of risk. The riskier something is, the higher the potential return (usually).

# Different levels of risk

  • No risk = savings account in your local bank
  • Little risk = bond portfolio (sovereign bonds are generally considered safer than corporate bonds, short-term bonds safer than long-term bonds)
  • Moderate risk = stocks & bonds
  • High risk = only stocks & peer-to-peer lending (via Bondora & Twino in Europe or Lending Club in the US)

If you don’t know which option to choose, go with the ‘little risk’ option, and when you feel comfortable with investing, add stocks to your portfolio. This will be a fine approach for the vast majority of people. I know some in the US, where retail investing in stocks is much more common than in Europe, will say that it is better to invest in stocks as soon as possible, and they’re right. It is potentially more profitable. But for people uncertain of how to invest and what to invest in, I think it is better to start with very little risk so you don’t get scared out of the market.

So you now know, based on how much risk you’re willing to accept, which of the options above you want to go with. So you want to buy stocks, or you want to be bonds, or you want to invest in peer-to-peer lending. How do you do this? Read on.

# ETFs – built-in Diversification

The simplest solution, and according to the Bogleheads the best one, is to invest with index ETFs. An index ETF is an exchange traded fund, i.e. a mutual fund you can buy and that buys assets so you don’t have to worry about which ones, how much, how often, etc. It’s essentially a managed portfolio that you can get into for a – in this case – very low fee.

Whether you want to invest in bonds or in stocks, or in a mixture of both, you can do so by simply buying a few ETFs. Vanguards ETFs are excellent for example, but many similar ones have popped up from other companies as well.

If you want to follow the classic 60/40 stock bond strategy, which is a very fine choice, you can do so with just two of the following funds:

  • Vanguard Total Stock Market Index Fund
  • Vanguard Total International Stock Index Fund
  • Vanguard Total Bond Market II Index Fund
  • Vanguard Total International Bond Index Fund

If you live in the US, choose the non-international versions. If you live in Europe, you might want to choose the international versions because they include more European assets and are therefore closer to home. But they’re all quoted in USD, so pay attention to the currency risk if the dollar exchange rate for the currency you live and save in varies wildly. I live in Luxembourg / the European Union, and the EUR / USD exchange rate is pretty stable so I do not worry a lot about this. I don’t think either the EU or US economy will disappear or crash anytime soon, so both assets in EUR and in USD seem safe to me personally.

# More complex investing – at your own risk

What I wrote above is enough to get you started, and it’s simple. And simple might actually be best. While I do enjoy thinking and reading about different stock investing strategies, like the Piotroski score and the Trending Value strategyit is entirely possible that a simple portfolio based on 60% Vanguard Total Stock Market Index and 40% Vanguard Total Bond Market II Index will beat the performance of my own portfolio over long time periods. 

Unfortunately for me, I like to take things into my own hands, and to play around with different strategies. That is not entirely rational, there’s also an emotional component to it. If you’re interested in different strategies, read up on them here on the blog and elsewhere. If you just want to start investing and take the simplest (and possibly best!) approach, stick to index ETFs, and read the Bogleheads guide. And do not worry about where the market stands currently. Just continue to invest gradually over time, and you have the best possible chance of getting wonderful results.

A note on peer-to-peer investing: Peer-to-peer sites like Bondora, Twino, Savingsstream and ABLrate offer wonderful returns, but if somebody tells you you get a return of 12%, this is not something risk-free. With returns that are similar to stock returns, the risk has to be close to that of stocks, too. So if you decide to venture into this territory, always remember that these forms of investing have not yet been around long enough to say much about their risks. As a consequence, I would recommend that you spread your P2P investments among several platforms (I now use Twino, Mintos, Savingsstream and Ablrate – Bondora was not a good choice for me personally) and that you don’t invest the majority of your savings into P2P sites. I think most of your savings should be in time-tested assets like stocks and bonds.

That should be quite enough to get you started.

5 comments | Categories: Investing, investment, Learning | Tags: , , , , ,

Comments (5)

  1. Thanks Jim for your post ! I have few questions for you. 1. You say do not ever invest borrowed money. You say that because it’s very risky? Like, if your investment gets in trouble, you will not have a money to give it back? Because I was thinking to borrow some money from bank or friend and invest into p2p lending. ( I guess it’s very bad plan) But if you have a bigger amount of money, you get more money from investment, so I thought it’s quite good plan to start 😀 So if I borrow money, invest into several sites like you, and do a very good loan diversification it’s still very risky?

    And what about ETF? In earlier posts, I think you mentioned that it is probably the best investment strategy for average investor. But what about its risk? It’s between bonds and stocks?

    And if you are investing in bonds or in stocks or in ETF, short term doesn’t matter and you have to focus on long term results? Let’s say I bought some stocks and bonds, and after 4 months I still have 0 ROI ir below zero, I should not lose my mind and get crazy? It’s pretty normal, and I should still invest?

    And what platform you use to invest in stocks/bonds/ETF and etc. Which one you thinks is the best? Does the chosen platform makes any visual difference in a long term period?

    Regards,

    Algirdas

    • 1. You say do not ever invest borrowed money. You say that because it’s very risky? Like, if your investment gets in trouble, you will not have a money to give it back?

      >> Never invest borrowed money IF you are not totally sure you can pay it back easily. If you invest borrowed money, you should feel comfortable and know that it’s no problem for you if all that money disappeared tomorrow. If you have 100K (for example a house that is worth 100K, or 100K in a savings account) and you borrow 20K to invest, it’s not a problem if you loose the 20K because you can easily pay them back. But if you have 20K at the beginning, and you borrow 100K and you loose the 100K, you are in trouble. So don’t do that. Ever. Only invest what you can afford to loose. If you do want to invest in P2P sites, use several and diversify. And START SMALL. If you want to invest 10K, start with 1K this month, and then wait two months until you invest another 1K. If you do it slowly, you can correct any mistakes along the way, and if you make a wrong decision you will not lose everything right away.

      2. And what about ETF? In earlier posts, I think you mentioned that it is probably the best investment strategy for average investor. But what about its risk? It’s between bonds and stocks?

      >> ETFs do invest in bonds or stocks, so the amount of risk is equal to stocks or bonds. But an ETF does not just buy 1 stock or 1 bond, but many different ones, so you have built-in diversification. ETFs are probably the best choice for the average investor.

      And if you are investing in bonds or in stocks or in ETF, short term doesn’t matter and you have to focus on long term results? Let’s say I bought some stocks and bonds, and after 4 months I still have 0 ROI ir below zero, I should not lose my mind and get crazy? It’s pretty normal, and I should still invest?

      >> Yes, it’s a long-term investment. Right now, stocks and bonds are pretty expensive. It’s not a good idea to invest all of your money into either category right now, because there could be a big decline soon. To avoid the question of when to invest, do it slowly. 500 euros this month, 500 the next, and so on. Spread out your investments so it will take you about one or two years to invest everything. That way you will be sure that you have not invested all of your money when the market was at its highest point. Do not worry about performance until you’ve been invested for 2 or 3 years at least. Just continue to invest a little every month.

      And what platform you use to invest in stocks/bonds/ETF and etc. Which one you thinks is the best? Does the chosen platform makes any visual difference in a long term period?

      >> I personally use TD Direct Investing in Luxembourg. It does not really matter which platform you choose. Every major bank should allow you to trade ETFs / bonds / stocks if you open a portfolio account with them. The only thing that matters with brokers / banks are commissions. Choose the bank with the lowest commissions for selling and buying.

  2. Hi Jim,

    You said: “Right now, stocks and bonds are pretty expensive. It’s not a good idea to invest all of your money into either category right now, because there could be a big decline soon” How to know when stock market reached the bubble or had a big decline? Maybe you can share a source where you can look the current stock market situation considering the whole stock market performance history?

    Do you invest in real estate or supplies (Gold silver) also? I ask you this, because, if the stock market is having a decline, no matter what stocks you have, all stocks goes down by its value. Many people say, diversify your portfolio by a lot of stocks, or by ETF (where are a lot of stocks and bonds) but the truth is, all stocks goes down if there is market crisis.( Like 2003 or 2008) Diversifying is just an illusion because you diversify your portfolio in the same asset just different stocks. Are you agree with that?

    and what is you exiting strategy? Or you don’t have one? You sell stocks on the market bubble and hold money safely at the bank or you invest your money somewhere else? In gold, silver etc? It’s very interesting for me. I read a lot of books during few months and realised that investing for long in stock market is very bad advice, because there are market cycles, and if you are 75 years old man and you have etc. 2 mln dollars in stock market and suddenly the market crashed you don’t have time to wait when market will start rising again and there you’ve lost a lot of money.

    thanks for the answer !

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