By popular demand, I’ve decided to publish a number of blog posts on investing for beginners. Yes, from anyone else this may be a tad patronising. Not me.
I think I could get this one right. Do you know why?
Because until about four years ago I was an investing virgin, so to speak. Yes, I had been paying into a pension but this didn’t really require even basic knowledge: It was a no brainer. My employer used to have one of the best and best run pension schemes in the country so joining was a sign of sanity rather than financial savvy. Yes, we do have a house that has increased in price nearly fivefold in 20 years but this wasn’t down to me either. John had already put an offer on the house when we got serious and the British government didn’t build enough housing.
You see, investment virgin, I tell you. Just like a very sizable proportion of the British population; particularly women. We women, you see, are good at paying off debt, frugality and saving but when it comes to investing we tend to chicken out; or leave it to our men folk who…Okay. I’m not even going to get there.
Four years ago investing wasn’t even in my vocabulary. This is what happens when you grow up in a country where you saved for specific reason and the only source of income was labour. Oh, and connection but this is a different matter.
Then four years ago I decided that investing is something I should learn and start doing. I started dabbling and opened an account with Nutmeg. I started reading and researching.
This is how I know about investing for beginners: I had to learn a lot to become a beginner. Last year, my overall return on investment was 22.6%. It may be beginners luck. I prefer to think that I have learned something; and Fortune smiled on me.
I learned quite a bit about investing and would like to help you start learning as well. Today, I’ll tell you about the five ways to make your money work for you. Knowing about these is, I believe, the corner stone of all investing for beginners.
- Investing in financial instruments
- Investing in luxury goods
- Investing directly in business
- Investing in starting a business
- Investing in developing your competencies.
(I’m not including investing in property today. This is a specialised kind of investing that is very capital intensive and probably a stage after investing for beginners. If you still would like to check out property investing have a look at the House Crowd and what they do.)
#1. Investing for beginners: investing in financial instruments
Since this is for real beginners, I’m not going to make it more complicated than it has to be. You’ll have to remember, however, that investing in financial instruments is very diverse and complex affair; some would say that this is a minefield for the beginner.
For now, you need to be aware that these instruments include investing in: bonds (bonds are the way of governments (and others) to borrow money from us; options, futures etc. (sorry, not even going to go there – these are fairly speculative, you really need to know what you are doing and even then…); 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); and Exchange Traded Funds (ETFs) (this are basket investment instruments).
One investment instrument possibility that is exceedingly popular (and underpins many of the more complex investment vehicles mentioned above) is investing in stocks and shares.
Trading stocks and shares in on any investing for beginners list while many people are not entirely clear about what this means. When you buy stocks and shares, in effect you buy a (small) part of a company. There are three main ways in which you make money from stocks and shares:
- Speculation. This is when the price of a particular share is going up because many people are buying it. Conversely, the price goes down when many people are selling their shares. Buying and selling in this case is subject to rumour, misinterpretation of information, emotion etc. Speculative volatility doesn’t have much to do with the value of the company. A tweet by a celebrity can have a large albeit temporary effect.
- Company value. This is when the price of the shares is directly linked to the increase or decrease of the value of the company.
- Dividends. This is a sum of money paid by companies (usually once a year) to their shareholder from the company’s profits.
Why am I telling you this?
Because you can do very little about speculative fluctuation except not fall prey to them. Don’t agonise over how your shares are doing and don’t check them every fifteen minutes – this will be a monumental waste of time and opportunity.
The other two, have given rise to two very different types of investing: ‘value investing’ and ‘dividend investing’.
When doing the former you look for companies that are undervalued for some reason with the expectation that their value will increase. My Rule Breakers portfolio is an example of that: I’ve bought companies that are either fairly new or they have had a mishap that is being remedied. And yes, my portfolio is doing well.
Dividend investing is about buying stocks and shares in companies that pay generous dividends. I have a guest post for you on dividend investing that you could read tomorrow: I’m still learning about this one myself and have not experimented with it.
Last but not least, robo-investors ought to be mentioned here. I’ll be writing more about these as well. You know that I have been investing with Nutmeg rather seriously (and persistently) and now I’m starting an experiment with Scalable Capital.
#2. Investing for beginners: investing in luxury goods
This is about investing in things like art, wine, jewellery and vintage cars. In principle, investing in the ‘finer things in life’, particularly investing in wine, 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.
You want my advice on this one? Stay out if you don’t have the eye for, and encyclopaedic knowledge about, a particular class of objects; thought this investing can surely spice up your portfolio.
#3. Investing for beginners: investing directly in businesses
This is the investing I’m really keen on and with, what I believe are, rather good reasons.
You see, risk is the bane of any investing and the biggest reason why people don’t do it. What is not very well understood by most every-day investors is that our perception of risk is correlated with our level of control. Simply put, this means that the less control we have over something, the higher risk we perceive it to be.
Don’t believe me? Let me ask you: would you be worried about nuclear war if you controlled the switch? No you wouldn’t.
It is the same with investing. We worry about losing our money on stock market because we have very little control over what is happening. Frankly, it many cases we have imperfect information as well never mind how hard we try to keep abreast.
When you invest in local businesses directly the risk-control seesaw swings.
You have more control and hence the risk is lower. This is why we bought 50% stake in a local MOT and car service garage.
Can you fail? Of course you can. At the same time, if you follow some fairly simple rules for selecting the businesses you invest in you have to be a real klutz to fail big time.
#4. Investing for beginners: start a business
This is usually the big, scary one that hides in the cupboard and every time it tries to come out you kick the door shut.
Yes, I get it. It is scary to start a business and branch out on your own. You’ll have complete control over how the business develops but the flip side to that is there is no one to blame for anything.
At the same time, investing in starting a business is one of the most satisfying and profitable investments you’ll ever make. Take my case, for instance. When I started dabbling in online publishing I forced myself to see it as a hobby; this way it was less pressure. Now my websites are a very neat side hustle; I have no doubt that were I to take the plunge and focus on these full time they will become a nice, proper online business. What started as a pleasurable way to spend 10-15 hours a week (writing and talking to you) may turn out to be my ticket to fulfilment and location independence.
Acting on ideas is much harder. But it can be learned.
Starting a business, including an online business, is not all flowers. It is still so much worth it!
#5. Investing for beginners: invest in yourself
Finally, a way to make your money work for you is through you. What I mean is that it is always worth investing in yourself, in gaining new and varied competencies.
These can range from cooking and baking to coding and public speaking. Investing in yourself can be spending money to develop a healthy habit; or get rid of a very unhealthy one.
Do you know that the £250 I spent in 2006 on a stop smoking workshop is one of the better investments I’ve made? To start with, I have not smoked for over ten year. Let’s, for simplicity sake, say 10. Are you surprised that by investing £250 for the workshop I’ve saved over £20,000? I am. And my lungs have recovered so my health has benefited. You see now why this is a cracking investment.
Remember also that education always pays off. And I’m talking about education, not degrees.
These are the five ways to make your money work for you that every manual about investing for beginners should include.
I know this is too much to take if you are just starting out. If you think this will help bookmark this post and see it as the skeleton on which we’ll be putting more muscle. Eventually we’ll get to the skin and even make up; have some faith.