How to invest money is something that has fascinated me for some time now.
I never thought I’ll be doing any of it.
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.
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).
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.