I don’t pretend to be a financial advisor (whatever that means) nor do I have a degree in economics (I am only 16 years old) but that doesn’t mean I don’t know fair amount about personal finance. During the past months I’ve extensively read books, articles as well as listened to hundreds of podcasts. So I have gained some experience and familiarity with the stock market.
When you think about investing, what comes to mind? probably those scammy video saying if you invest in Tesla, Bitcoin now or 10 years ago you would be a million today. But I want to give a clear picture, and I don’t wouldn’t write about how to invest, if I hadn’t some experience. I wanted to write about investing for a long time, but I want to stay true to myself, so that’s why I waited till I gained some experience, and now here are the things I wanted to know before I started investing.
So, let’s answer the basic question : What is investing?
So before I answer that question, I want to go basic. What happens to our money over time?
Well we know that money loses money over time, because of something called inflation and the best example I can give is 30-40 years ago. Coffee costed 79 cents, and that same coffee cost 4$ today, that inflation in work. And the reason we have inflation is because of increase in public spending, hoarding, tax reductions, price rise in international markets etc. are the causes of inflation. And that’s why money loses its value over time, at a rate of approximately, 2-2.5% per year. This is why we should never save our money in a bank, or anywhere else for that matter.
If you were to store your money under your mattress for a long period of time, every year that money will be worth less and less because of inflation. If we can invest our money in a way that match the rate of inflation our money won’t lose value. If we can invest our money with an interest rate that is higer than the rate of inflation, we can make investing profitable. That’s why many people save their life savings in their savings account to avoid the inflation problem, but you have to remeber the reality isn’t that sweet, the savings account will only save you 0.01%, but you still lose your money because the inflation is 2-2.5%, but instead of 2.5% you will lose 2.4%, but that isn’t good.
Here is a good example : Did you know that diamond is actually not that rare as we think, why is that? Well the diamond business know what they are doing, if everybody had let say rare nike shoe, then the value loses becuse everybody has it, that’s why diamond bussnis let say hold their diamond, and only sell like 10 diamonds, to keep it’s high value, and still have many diamond in stock.
Now on what investing is?
Simply put, investments enable you to increase the value of money that you hold. Investments could be in the form of business assets, paper assets (stocks, index funds), real estate or commodities.
For example if you were to buy a house, that property would be an investment if :
- You rented that house out to tenants and made a profit after expenses every month, or
- You made a capital gain (your house is worth more now than when you bought it) when you sell the house.
Whilst rental properties can be very good investments, they are quite high maintenance and require a large amount of capital to get started.
Therefore, as a beginner investor, paper assets (shares) could be a better option.
What are share?
When you invest in shares, you are essentially buying a part ownership in the company. If company is successful, over time, your shares increase in value.
You can make money from shares in two ways:
- Dividend Payments: Where a company pays a portion of the profits to shareholders, based on the earnings in that financial year
- Capital Gains: If the value of your share have risen over time, you make a capital gain, when you sell.
Shares can be bought from an online stock broking service.
You can buy shares from a stock broker, and these days will likely an online service.
I wouldn’t advise investing in individual stocks, because of risk. Instead you should invest in Index funds. Index Funds are the best, safest and easiest long term investment strategy for most people.
On index Funds
In index fund is made up of two parts. The fund is where a group of investors pool their money together to be managed by a fund manager. This fund manager then decides where the money is going to be invested. The index refers to a specific group of companies within the stock market that a fund manager will invest in. Examples include:
- FTSE 100 Index
- S&P 500 Index
- Dow Jones Industrial Average
Index funds are good because they generally rise over time. See the graph for the S&P 500 Index below as an example.
I invests primarily in the S&p 500 index, and S&P 500 is basically the 500 biggest company in England, and the reason we invest in index funds is basically because it shows the country’s economie, and a country’s economie you wouldn’t ever lose money, I know it’s a controvisal statement, but just hear me out. It is true tho.
Index funds are a good investment for beginners because:
- They are easy to invest in
- The provide a decent amount of diversification
- Index funds tend to have very low fees
Warren Buffet once said, if he were given $100,000 to invest, he would invest in an Index Fund. It’s actually quite difficult to beat the market with an actively managed fund, and they charge more on fees.
On Risk and Getting Started
The only way to lose money in anything is to buy it, and then sell it for less than what you bought it for. Investing is only risky if you do that, or invest in single stocks.
You shouldn’t be really putting any money into stocks or shares that you may need in the next 5 – 10 years. If you keep your money in a S&P Fund, generally over the long term, you should earn around 10%.
Investing is only risky if you are cash strapped and thinking short term. So you wouldn’t ever lose money, but what if the market crashes?
Well, then just wait, wait, wait and wait. If you see down below if you invest let say 2 months before the crash 3 august 2007, where it costed 1433 for one stock, and you just see it go down and down, and you say I shouldn’t have invested in stock, and you say screw it, this is some BS. and then sell it at 850, then you have officially lost all your money, but if you waited and waited till 2014, where it began to stabilize again you would see that you are now begin to “make money”
But what if the top 500 companies just all fails?
Well, if we say that those 500 companies that give the most tax to the government suddenly just dies, then you would have greater problem then the stock market. What do I mean? Well, if all the most influential company die, the value of the money is 0, and then at that point we have wars, no food it would just be a chaos, then you would use the money to wipe yourself after the toilet, because money has lost all is money. But that wouldn’t ever happen, unless there is a war. But at that point, you have bigger problems, then your money. So it’s all about the long term game.
How do I invest in index fund?
Just search for best broker in … (and the country where you live in)
Example : I live in Denmark, and I would search, best broker in Denmark, and the their will be a bank, login, create a account, and start investing.
But to show to you all, that I am not a talker, but a doer here is my account, I invested 300 kr (34 dollar), that just was laying around in the house, and invested in OMX c20, which is the top 20 company here in Denmark, just type nasdaq —(you country) index, and you can support your country. But I earned 400 kr, which equals (46 dollar), which for a 16 year is a lot, and if I just forget about for the next 30 years, then the stock market should at least grow 5% each year, so if my math is correct : 5 * 150 = 150% * 400 kr.
Then I should get 600 kr or 69 dollar, that might not sound much, but you have to remember that I only invested 36 dollar. If I invested my whole life saving, I would get much more, so that my plan, just invest my whole life savings on the index funds. And boom, I don’t loose my money to inflation any longer. And can retire with a lot of money, if thats your plan.
What is passive income?
Passive income for me means money I can earn even when I am sleep, so I don’t have to physically be their, but it will take care of it self. I don’t like to use the word “Passive income”, because it has been overused in those scammy ads, and how to get rich overnight. But there is no scheme that can get you rich overnight.
When Should you get Started?
Start investing as soon as possible, I am 16 years old and investing, you should to, but:
- Make sure all debt is paid off
- You have an emergency fund of 3 – 6 months in cash
- Don’t put any money in stocks that you may need in the next three to five years
As they say on the Motley Fool there is no way your future self will ever regret the decision to invest.
Hope it has helped you, get over the fear, and just start investing. If a 16 year old, can do it, you can too.