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How to Invest Money and Make It Fun: Strip Away Confusion to Invest with Confidence

How to Invest Money and Make It Fun: Strip Away Confusion to Invest with Confidence

how to invest money

How to invest money is something that has fascinated me for some time now.

I never thought I’ll be doing any of it.

Why?

Oh, there are so many reasons for that.

First, I come (originally) from a part of the world where investing money was a dirty word; a bit like swearing or telling anti-communist jokes. Thinking too much about how to invest money got you either at the wrong end of your friends’ jokes or in much more serious trouble.

Who wants to be branded a ‘lumpen’, after all (and if you don’t know what this means, you can Google it.)

Next, I spent too long worrying about money and survival; I should have recognised sooner that I’m not broke but just plain irresponsible. This is water under the bridge and now how to invest money is what keeps me awake at night.

And last, but not less important, for a long time I gazed at the long tables in the Financial Times not being able to make heads or tails out of them.

I tried to do what I’ve always done: read about investing (in stocks and shares) and educate myself.

You know what? I soon realised that most of what is written about how to invest money is written by men for men. It is full of jargon, formulae and graphs that will confuse Albert Einstein.

So, I started thinking about ways to put some order in all this investing money lark and, if and where possible, simplify it.

Here is what I came up with.

#1. Thirteen basic rules of how to invest money

  • Rule 1: Don’t be blinded by the maths and graphs: investing is as much an art and a gamble as it is science.
  • Rule 2: Leave your certainty at the threshold when investing: you may win or you may lose but it will be interesting.
  • Rule 3: Don’t borrow to invest.
  • Rule 4: Don’t invest money you’d need soon; or money you’d miss terribly if thing go wrong.
  • Rule 5: Keep it simple use Nutmeg investment platform, or similar, if you can’t be bothered to learn.
  • Rule 6: Start a self-directed portfolio only if you are ready to learn, dedicated to persist and disciplined enough to manage it.
  • Rule 7: Buy shares only in sound companies.
  • Rule 8: In the stock market you still make money when you buy, not when you sell (buy when shares are under-valued).
  • Rule 9: Use your common sense when buying shares; look beyond accounting.
  • Rule 10: Use information sources you trust.
  • Rule 11: Every challenge can be turned into an opportunity.
  • Rule 12: Stocks and shares are not the only possible investments.
  • Rule 13: No, your house is not an investment.

#2. This is where you can invest your money

Remember Rule 12 of investing?

When we think of investing, we usually think about stocks and shares. However, this is by far not your only investing option.

Here are some other possibilities (albeit, some of them are not as sexy as discussing shares and drawing graphs of prices).

Let me also remind you that every time you spend money on something that could potentially make you more money, you’ve made an investment (I did warn you, my reader, that I’ve made it my mission to keep this simple).

Starting from this definition, here are some ‘traditional’ investing possibilities that are open to you:

  • Bonds. Simply put, bonds are the way of governments (and others) to borrow money from us.
  • Stocks and shares. This is the way to buy a (small) part of a company.
  • Options, futures etc. Sorry, not even going to go there – these are fairly speculative and you need to really know what you are doing to get anywhere. Even then…
  • Art, wine, jewellery. In principle, investing in the ‘finer things in life’ is fun. In practice, it needs a lot of specialised knowledge because every time you buy a piece of art you are betting that its value will increase. Only people who understand art have the eye.
  • Mutual funds. These are investment strategies that allow you to pull your funds together with other investors and purchase a basket of stocks, shares, bonds and other investment instruments.
  • Exchange Traded Funds (ETFs). A basket investment instrument.
  • Property

I have to tell you, friend, that of all these I only recently started a stocks and shares portfolio; and it is a big experiment the progress of which I’d share with you.

Why not dabble with the rest?

Because, I believe that ‘traditional’ investments share the following problems:

  • High entry costs: there are different costs involved in traditional investing but the main would be knowledge and capital.
  • Volatility and unpredictability: Well, I don’t need to tell you much about this one. Only in the last five years, the stock market crashed twice and the property market once.
  • Returns depend on cycle: If you were in your thirties when the stock market crashed last you’d be fine; but if you needed to draw your pension then, you are truly and royally screwed.

This is why I favour a bit less ‘traditional’ forms of investing. These include:

  • Our Nutmeg investment. Although my account is not doing much at the moment it is still over what I put in; John’s Nutmeg ISA account is still approximately 6% in profit. (He’s promised to analyse why this happened and we’d let you know.)
  • Our investing experiment in The House Crowd: this is a way to invest in property without the bother of owning houses and dealing with tenants. And it returns better as well!
  • Buying internet businesses. Yep, I did this one and when the time if right I’ll probably do a bit more of it.
  • Investing directly in local businesses: I’ve already told you about this one in other posts. But I’m not sure that you’ve heard the latest: we are the proud co-owners of a car maintenance garage. And I have very high hopes for this one.
  • Investing in self: I know this one sounds a bit naff. Still, I count this as a very important investment and it includes attending courses, buying books and using time to learn.

And before you ask, an investing genius I’m not. Some of my investments work out and some fail rather spectacularly. For example, my shares in Tesla are doing great (and I did buy them at the end of February which was just in time); my shares in SolarCity are dragging my whole portfolio down.

But you know what?

When my investments work I’m pleased because my money has made me a bit of money. When they fail I’m truly happy because this is my chance to learn; so, my money will make me a lot of money.

You just have to remember that investing is no rocket science and the main thing, as with life, is to be open minded and ready to learn.

#3. Helpful resources

Investing may be a unique mixture of science, art and gambling but when making decision you still need to know a lot.

Even when you are keeping it simple by investing with Nutmeg (or Betterment which is its US cousin) or The House Crowd you need to do your homework. But this is easy: just visit their websites and read all that is on them. Oh, and you can Google them and see what else is knocking about.

Investing in local businesses needs local knowledge. You may hear about opportunities in the local bar, or from your friends. What you need to know here is what the features of a promising business are and how to know it from a failing one. You may also start learning about turning failing businesses around; which means that you either have to understand the business or ‘get in’ with someone who does and whom you trust. (I know nothing cars; it takes me a year to work out where to put the fuel. This is why, the garage is 50:50 venture with someone who knows everything about cars.)

The situation is very different when you start investing in stocks and shares. It took me quite a bit of reading and looking around to come up with the four key, in my opinion, resources:

  • Investopedia: this site does exactly what it ‘says on the tin’ – it educates the word about finances. At it spans educational levels as well so you can use it even as a beginner.
  • The Motley Fool: I love The Motley Fool and the readable investing articles it publishes. One definite advantage of this site, as compared to others, is the way in which their stock picking advice is organised: you can select the ‘package’ that is best suited to you and your needs. I, for instance, have joined the Rule Breakers (best stay true to my nature, I thought).
  • This is Money: another favourite of mine. It goes much broader than investing and has this messy, disorganised feel about it (which I really like). Their analysis is usually spot on and their knowledge of all things money undisputed.
  • Modest Money Stock Wizard: my friends at Modest Money not only publish interesting and well informed articles on investing and analysis of specific stock but have also developed a potentially very useful tool. I’m still playing with it and learning what it can do but why don’t you join me? You can surely find the stock you are interested in, and a wealth of information about it, very fast; and in four different markets.

#4. Select an investing platform

This is what you should do when your mind is set on giving the stock market a go.

Sound trivial but I’d guess that not knowing what to do is stopping a lot of people (if I were a bit braver, I’d say ‘a lot of women’).

I selected the investment platform I use – TD Direct Investing – by using this resource to compare what’s on offer.

Please make sure that you look at several platforms and select the one you feel comfortable with (I selected TD Direct Investing because of relatively low fees and being able to trade US stocks as well as UK and European).

Good luck!

Finally…

You know, friends, my investing at the moment is just like my running: I’m not very good but I’m very keen.

Which tells me that I’ll probably improve dramatically over the next several months.

But whether I improve is not really the point here. I’ve decided that I’ll use The Money Principle to write more about investing in a way that is fun and easy to understand.

How to invest money shouldn’t be shrouded in formulae and mystery; it should be discussed so that as many people as possible can achieve mastery.

Now, please share your investing experience. And I’d love to hear about your failures: how otherwise we’ll learn?

photo credit: un petit écureuil via photopin (license)

The single biggest challenge to investors: the three faces of investing

The single biggest challenge to investors: the three faces of investing

challenge to investors

Couple of months ago I was invited by TD Direct Investing to take part in a debate on investor confidence. Of course, I accepted; after all following our hunter’s focus on debt our sight has moved to how to invest money. Having said that, we do believe that the principles of sound money management are the very similar irrespective of whether one is paying off debt or investing – in both cases you build wealth. But I seem to be digressing a bit.

We had a debate and we recorded a video; here is the link to the video but I’d rather you don’t watch it; or at least if you decide to watch the debate (it is rather long, I warn you) please do close your eyes so you don’t get destructed by the way I look. Just listen to the smart things I have to say (this is a joke btw).

One of the questions we were asked during the debate was:

What is the single biggest challenge for investors?

On camera my answer was short and succinct:

The single biggest challenge investors currently face is the volatility of the markets.

So far there is nothing  interesting and/or original about this but bare with me: the interesting part is in the reasons why I think that this is the single biggest challenge to investors.

I believe that volatility is such a challenge because it changes the relationship between the three faces of investing, namely science, art and gaming. Investing has always been, or has been presented, as a unique combination between the three; it also requires an unique blend of knowledge, intuition and awareness of risk and probability.

Probably the best example of investing as science is provided by the Boggleheads’ philosophy: this is all about well informed choice. It may be choice of lifestyle, choice of investment instruments etc. Interestingly, approaching investment as science and research features both a particular stage of learning about it and specific investment instruments. I believe that research is absolutely essential to be able to choose risky stock to buy; and that this research should be rather broad (learn most there is to know about the product, the company, the key people in the company and the others who have similar product).

Next, is investment as an art form. This, I believe, kicks in when one is shaping and re-shaping their portfolio – what investment portfolios look like is not a matter of science and research but of feeling and balance.

The aspect of investment that fascinates me most is the gaming part of it. This applies to specific investment instruments like some options, exchange-traded funds (ETFs), CFD trading (Contract for difference) and different forms of financial spread betting. These are all rather speculative investments. CFD trading, for instance, is an equity derivative used by traders (investors) to speculate on the share price of particular shares without actually holding any of these shares; the contract between the two parties is about paying the difference between the current price of the share and its value within certain time frame. High risk but can be potentially very rewarding.

A less discussed aspect of investing as gaming is the gamble that one necessarily takes. Different investments carry different level of risk, true. But because of the level of complexity of financial markets and the stock market, there is always an element of risk we have no awareness or control over, risk that can’t be calculated.

In relatively stable markets these three elements mostly coexist and if any of them took a bit of precedence these was the scientific, predictable and ‘safe’ element.

The situation is somewhat different in volatile, fast changing markets. In such cases the face of investing that can become dominant is the gaming/gambling one. It is no longer possible to present investing as scientific and/or artful activity with mostly predictable and positive outcome.

At the moment investing in the stock market is to a large degree a gamble; and as every half competent gambler knows you take to the table only what you really can afford to lose.

It seems to me that making the transition from seeing the stock market as a viable long-term investment prospect to viewing it as potentially expensive game is a challenge. Another challenge is to workout alternative investment strategies.

What do you think is the single biggest challenge to investors?

photo credit: Mariano Kamp via photopin cc