For many people, investing can be a daunting concept.
With a whole range of financial information available online, beginner investors are often confused about where to start.
As a result of this confusion, many put off the topic of investing, believing it to be complicated and only suitable for professionals.
But that’s not the case at all.
If you’re interested in starting to invest, and are looking for a place to arrange all the information you need in a concise and coherent manner; you’ve come to the right place.
This article is the first part in a series of guides that The Smart Investor will be publishing to help new investors.
These guides will equip you with the right skills, knowledge, and time-tested principles to kickstart your investment journey.
We promise it won’t be too complicated.
What is investing?
Investing, as defined by Benjamin Graham, is an activity that promises safety of capital and a satisfactory return, upon a thorough analysis of the underlying asset.
This means that any sound investment should not place your invested capital under unnecessary risk, while still providing a return that beats inflation.
Graham, famous for being the father of value investing, believed that any investment that did not meet the above criteria should be termed “speculation”.
As an analogy, imagine you intend to buy some durians.
If you were speculating, it would be like showing up at the fruit stall and picking several durians that looked the prettiest to you.
But if you want to get a sweet and creamy durian, you would have taken time to inspect the fruit and attempt to tell if the flesh within will be to your liking. More meticulous customers may even request a sample.
Investing is similar to the latter process.
When you buy shares of a company, you are paying for a piece of a living, breathing business.
It would make sense for investors to get a good sense of how healthy the business is before buying a slice to own.
One of Graham’s students, Warren Buffett, himself a very successful investor with decades of experience, also preaches this practice of doing research before buying a stock.
In his 1996 letter to shareholders, Buffet wrote, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Why should you invest?
“If you don’t find a way to make money while you sleep, you will work until you die”, quips Warren Buffett
Everyone has his or her own personal financial goals.
It could be funding a dream holiday, purchasing a brand new home, or getting that cool car.
You might even be thinking of building a passive stream of income during your retirement so that your golden years can be enjoyed without breaking a sweat.
By investing your money, you will be able to grow your wealth and achieve your financial goals much quicker.
If you invest $1,000 in the stock market, which, on average, rewards investors with returns of 8% a year, your initial investment will double to $2,000 in nine years.
In contrast, a savings account which yields 1% per year will only turn your $1,000 into a paltry $1,094 in the same nine years.
This process, known as compounding, becomes much stronger when you enjoy a higher rate of return.
Thus, by investing prudently, you can grow your pot of money more quickly and achieve your retirement goals in a shorter period of time.
How to invest your money
There are several investment options available in the market.
Stocks, as you already know, represent ownership of a company. Shareholders earn returns either through share price appreciation (i.e. capital gains) or dividends.
Bonds, on the other hand, are a form of borrowing by companies or governments. When you buy a bond, your principle is typically guaranteed and returned to you when the bond expires.
Bondholders will receive a regular interest payment, also known as coupons.
Another popular option for investors is exchange-traded funds, or ETFs.
ETFs contain a basket of stocks that allow investors to gain exposure to a certain market or industry without having to pick individual stocks.
Robo-investors, a form of automated investing, are also rising in popularity in recent years.
Robo-investors allow investors to take a hands-off approach to investing, making use of algorithms to manage an investment portfolio based on one’s goals and risk appetite.
Assessing your goals
Before you start to invest, it is important to know what your objectives are.
Defining your objectives keeps you grounded and helps maintain your discipline as you navigate the turbulence of the financial markets.
You could be targeting financial goals such as achieving a specific stream of passive income in retirement or amass a certain level of wealth by a certain age.
With a tangible goal, you can clearly outline the steps needed to achieve these goals.
These steps can include knowing how much and how often you need to invest over the years, and correspondingly, how much to budget each year.
Opening a brokerage account
If you’re now ready to begin investing, you will need to open a brokerage account.
A brokerage account allows you to access financial markets, as well as buy, sell and store your securities.
There are, however, many factors to consider when picking a brokerage.
You might not be familiar with the fees charged, what markets can be accessed, and the reliability of the broker itself.
But fret not, as we will be publishing a brokerage comparison on The Smart Investor’s site very soon.
Disclosure: Herman Ng does not own shares in any of the companies mentioned.