Written by Andrew Cassar Overend
25 min read
Last Updated on August 26, 2021
In this Master Class you will learn:
You can also access a visual summary of the article here.
In spite of my background in economics, when I decided to start investing, I personally found it super challenging to piece the puzzle together. The abundance of information dispersed across the web may seem overwhelming at first, especially if you have no background in economics or finance. By the end of this guide, you should be equipped with all you need to consider before investing, how to actually invest, and what you need to do after investing.
Several individuals associate the term "investing" with buying stocks in the stock market. But in truth you can invest in anything of value which you understand and feel that has good return potential.
Over the coming weeks, we will be publishing further deep dives on how to invest in each asset class, namely equities, cryptocurrenices, precious metals and real estate. Send us a message using this link to request which topics we should give priority to.
Before jumping on the learning train, this article takes it for granted that you've made the decision to manage your own money and avoid the drawbacks involved with appointing a financial advisor.
With that said, here are 10 steps on how to get started investing:
When we buy a good or service on credit, we instantly satisfy our consumption needs but create a future repayment obligation which we call debt.
Investing is the exact opposite of buying on credit: when we invest, we give up some of our resources in the present to benefit ourselves in the future.
Investing is different from saving:
Saving is the riskless practice of storing money where it is easily accessible and where its value remains stable. The most common place for people to save is at the bank, but over the past few decades, as interest rates have been driven down to zero, policymakers have robbed us of the opportunity to derive any meaningful return from these savings. This will have significant implications on the purchasing power of our wealth, the duration of our working lives, and our ability to sustain a longer retirement.
Investing is the practice of putting money to work by taking on some risk. The risk is that the value of the initial capital invested may fluctuate. This means that although the return on investment is never guaranteed, if you do your homework and invest diligently, the probability that your investment pays off, exceeds the likelihood that you lose the initial capital invested.
The return prospects with investing are far superior than the interest earned on saving. In fact when the average rate of money growth among major Central Banks is 12.5%, unless your wealth grows by this same rate, you are getting poorer without knowing.
Therefore, investing is no longer a choice - it is a must.
Once you've made a decision to invest, the next things to consider are your age and risk tolerance.
The first thing to determine is your time horizon. For how long do you plan to invest? When will you need to withdraw your capital?
You can invest for the short term, medium term or the long term.
You can even hold several investments with different time horizons.
|Time Horizon||Immediate Term||Short Term||Medium Term||Long Term|
|Time Horizon||< 1 year||1-5 years||5-10 years||10 years+|
|Scope||Buying and selling assets on a daily, weekly or monthly basis to benefit from from rapid changes in price||Buying and holding an asset to benefit from a short term transitory trend||Buying and holding an asset to which has upside growth potential up to 5 years after which the returns will be less attractive||Buying and holding an asset which is still in its beginning stages and has significant future upside|
|Ideal when||You are a day trader, swing trader or speculator||You are older and prefer safety||You are middle aged and target moderate returns with limited risk||You are young and the prime focus is to compound your initial investment|
|Tax Implications||Taxed at the marginal tax rate on ordinary income||Capital Gains||Capital Gains||Capital Gains|
If you buy assets to resell them in less than a year, your investment will be more liquid
If you buy assets for the longer term, time will be on your side for the investment to play out, so the potential returns are higher. The tax paid on longer term capital gains is lower than the tax paid on profits generated in less than a year. However, longer term investments are less liquid.
Your age and the duration over which you plan to invest are not independent of each other.
Investing generally has a long term connotation, but the long term is not the same for everyone.
Let's say a 20-year old student invests for retirement at 65 years of age, meaning that the time horizon in this case is around 45 years. This individual has the facility to be more aggressive in his investment approach, in the sense that riskier investments with high growth potential can be opted for over safer investments with lower growth potential. This young individual may be more inclined to invest in speculative stocks or explore the crypto universe because time is on the youngster's side. Any losses incurred can be made up for by earning future income.
But young individuals may experience capital constraints which may prevent them from investing significant amounts. The 20-year old is unlikely to have a stable income and may have significant expenditures ahead, such as college, a car, rent or mortgage, marriage etc. This means that the proportion of income which can be allocated to investing is lower than the middle aged individual with a stable income.
In fact, a 50-year old married engineer may not face as much capital constraints as the young student. Because early adulthood expenses have been already made and because he/she enjoys a stable income, the engineer can afford a larger sum to invest. However, at the same time this individual only has 15 years left until retirement, so a less aggressive investment approach would be more prudent. In the engineer's case, the risk of making an investment which could go wrong is equivalent to the risk faced by the student, but the difference is that the 50-year old engineer does not have sufficient time to make up for any investment which does not work out.
Therefore, while the engineer may have more capital to invest, a more defensive investing approach should be pursued, with a portfolio having more weighting in value stocks of companies with a strong financial position which pay dividends, bonds, real estate or rather than riskier growth stocks or cryptocurrencies.
The older you get, the less aggressive you should be with your investments and the more capital you should allocate towards investments which guarantee a stable, albeit low return.
Another issue to consider prior to investing is your personal situation. Have you set aside an emergency fund equal to 3 to 6 months of your income? Do you have any debt obligations which you must service? Do you have a stable income? Will you incur any significant expenses in the short to medium run? Do you have a partner or kids which are dependent on your earnings? Do you have parents dependent on your financial state?
If your reply is in the affirmative, then a less risky approach should be adopted when investing. Also be sure to hold some dry powder in case of unprecedented emergencies.
Be mindful of any substantial expenses or calls on capital which you may need to meet in the short to medium term.
By definition, when investing you will take on risk. There are several risks, including:
Inflation Risk - the risk that inflation will eat into your investment returns on cause your asset to underperform relative to other assets;
Counterparty Risk - the risk that the opposite party involved in the transaction will not fulfill its obligations. For instance, if you hold a bond of an insolvent company, then you may risk losing the money you invested in the company.
Volatility Risk - the risk that the price of the asset you purchased widely fluctuates, irrespective of its future potential.
Choosing not to invest because of these risks is no excuse. The risks only become significant if you speculate or seek investing advice from the Reddit wallstreetbets crowd - but if you do your homework, filter out the noise, and stick to your core investment thesis, then your investments are bound to pay off.
If you are unable to stomach the risks of seeing your money fluctuate on a daily basis, then simply don't look at your investments except for a couple of times a year. As Tony Robbins puts it, think of investing as a tax - money which you will pay and forget about. The only difference is that unlike taxes, you will be able to claim back the investment in the future.
Understand the risks involved with investing, invest diligently by doing your homework, and do not let short term noise distract you from your long term goals.
The next thing to do is to decide on your investment strategy, namely what you will invest in and in what proportion. There are several asset classes which you may choose from. The following table lists the most common ones:
|Asset Class||Examples||Cost of Investment||What you need to invest|
|Equities||AAPL, TSLA||Commission when buying and selling, Inactivity fee||Broker|
|Government Bonds||TLT, SDEU, IGLT, DWS||Commission when buying and selling|
|Corporate Bonds||LQD, HYG||Commission when buying and selling||Broker|
|Cryptocurrencies||BTC, ETH||Commission when buying and selling, Charges when transferring from exchange to wallet||Exchange to buy and sell/ Hot or cold wallet for storage|
|Commodities||GLD, SLV, XLE, COPX||Commission when buying and selling digitally|
Shipping and storage costs when buying physical asset
|Real Estate||Commercial, Residential, Industrial, Land||Notary Fees, Bank Fees, Government stamp duty, Commission when buying through estate agent, Lender repayment when purchased using debt||Notary, Lender|
|Rare Assets||Arts, Antiques, Watches, Wine, NFTs||Shipping and storage costs when buying physical asset |
Commission when buying through dealer
|Business||Any field you are competent in||Trademark registration, Cost of goods or services, Cost of equipment, Repayment to lenders||Idea, employees, VAT|
Note: Currencies and options were purposely excluded to keep things simple.
What you invest in depends on your knowledge, liquidity preference, inflation prospects, affordability and the price relative to intrinsic value.
Knowledge: In a previous article, we clearly distinguished between investing and gambling. Gambling is the act of speculating on future return prospects without any founded rationale for believing these prospects will materialize. Unless luck is in your favour, simply buying assets because your friend or social media influencer advised you to do so is a recipe for disaster. Therefore, it is important to clearly outline why you will be investing in the asset you choose.
Inflation:inflation is a key consideration you should factor in when constructing your investment portfolio. Otherwise, your wealth will deteriorate in value. Because of their fixed returns, bonds are the least desirable asset when the risk of inflation is high, but the share price of companies which are able to raise selling prices more than any rises in the cost of inputs do well.
Liquidity: A liquid market is one in which there are several buyers and sellers. This means that if you want to buy an asset, you will find a seller within no time. If you want to sell an asset, you will have no problems finding a buyer. This means it is relatively easy and cheap to get in and out of an investment. In general, the most used measures of liquidity are transaction costs and the volume of transactions relative to the variation in price.
Affordability: Invest in what you afford. Financial instruments like equities, cryptocurrencies and bonds are generally easier to invest into than real estate or tangible precious metals. Aside from the frictions which exist in acquiring a piece of land (architect, notary, bank etc.) or buying physical gold and silver (shipping, customs, storage), these assets cannot be subdivided into smaller amounts.
Price relative to value: During your errands at the supermarket, you've probably noticed that the most crowded aisle is the one which has the "discount" section. We should approach investing in the same way. The best investors are able to identify any cheap asset and jump in at the opportune moment. The likelihood that an investment will work out in your favour is higher if you get in at a cheap price.
Invest in an asset class you understand, afford and enjoy learning about, keeping in mind the asset's performance under inflation, its relative liquidity and the price it is trading at compared to its true worth.
While your risk exposure can always be controlled, there are some costs associated with certain asset classes which cannot be avoided. These costs vary by asset class. Some costs have been drastically reduced thanks to digitalization and market competition.
For instance, investing in financial instruments has become dirt cheap or even free in some cases through platforms like Revolut, eToro and Robinhood.
However, transaction costs in other assets like real estate remain high, making the real estate market less liquid than the equity market. In this case, notary fees, bank fees, and certain Government taxes need to be paid upon acquisition of the asset, and since the value of the tax paid is usually a percentage of the price of the property, then costs escalate quite quickly.
Besides, at the time of writing, investment is heavily centralized. This means that in most cases, you will need an intermediary to process the investment for you.
In the case of equities, ETFs, and bonds traded on an exchange
To invest in physical metals such as gold or silver, you will also need a dealer or broker which holds inventory of the precious metals. And unless you want to store the precious metals yourself, you will need an intermediary to store them in their vaults. Usually, the dealer offers storage services.
For cryptocurrencies, you will need an exchange, but brokers are optional. You will also need a wallet. Wallets can be "hot" or "cold". A hot wallet is a software wallet which has some form of connection to the Internet. Cold wallets use a hardware device to store cryptocurrency ownership without connection to the Internet. The scope of most crypto projects is to eliminate centralization, and in fact, several decentralized exchanges (DEXs) use pre-programmable automatic market makers to match buyers and sellers.
Real estate is the only asset class where the number of intermediaries involved is in your control. If you are lucky enough to directly make contact with the seller instead of going through the estate agent route, then you can avoid some major fees. Besides, if you manage to acquire sufficient capital to purchase the property without using a bank, then you will incur lower fees. Unfortunately, legal proceedings are inevitable and you will always require the services of a notary.
As for scarce assets such as art, watches and wine, unless you are able to interact directly with the seller, these generally exchange hands via auctions which are administered by a third party who takes a commission on each sale.
Under the "what you need to invest" column in the table above, I have summarized the requirements to invest in each asset class.
Familiarize yourself with the costs involved when investing. Most investments require intermediaries to match buyers and sellers. Digitalization has facilitated market access and improved competition, causing the costs of these intermediaries to reduce substantially, particularly when it comes to financial instruments. While you can get away without planning your costs when investing in financial instruments, you need to plan diligently prior to investing in real estate to ensure that you will be able to meet the expenses which arise.
This is the most important step. After deciding in which asset class you wish to invest, it's time to dig deep and assess the value of the asset relative to its price. An analysis of the fundamentals of the asset you select is crucial to determine whether it is a right time to invest or not.
The following are some key points you should take note of for each of the asset classes mentioned above. Over the coming weeks, we will be delving deeper into each of these asset classes.
When investing in equities, a solid assessment of the financial position, income statement and cash flow of a company is a must. But always remember that past performance does not guarantee future performance. Does the company operate in a growing industry? Does the company have a strong competitive advantage or renowned brand? Does the company have a small, medium or large market capitalization? What risks does the company face? At what stage of its life cycle is the company at? Does the company pay dividends? If so, has it ever missed a dividend payout? Do you like the management team? For how long do you plan to hold the stock?
When investing in bonds, an assessment of expected inflation is required. You must be able to understand the yield curve, the market's expectations of inflation, potential policy responses to economic developments (such as whether Central Banks will continue their bond buying intentions) and Government's funding requirements
When investing in cryptocurrencies, you need to evaluate the tokenomics of the crypto asset, while identifying its use case and what problem the developers intend to solve. If you already have some basic knowledge of cryptocurrencies, here is a good place to start: https://tokeninsight.com/. Otherwise, we'll be publishing our own crypto analysis soon - sign up to get notified when it is published.
When investing in real estate, the interest rate environment, the price and the location of the property are among the important factors to consider. Whether the property has sea views or green areas surrounding it and the risk that further buildings are built around the property also need to be considered. The potential rental demand, the rental price to house price ratio and the price to area ratio, are important metrics to identify good buying opportunities. The worst thing which you could do is to buy a property when prices are high. If a market crash occurs, assuming you took out a loan, you will end up having to service a debt which is higher in value than the property you bought.
When investing in precious metals or rare assets, you must be aware that these assets generate no stream of inflows. However, they are demanded for their ability to retain their value in a crisis and to shield against currency devaluation. This means that they are only desirable when real yields
Put in the work! Make sure you understand the asset class you will be investing in. Analyse the fundamentals of the asset, estimate its value relative to price and assess its future potential.
In an upcoming master-class on how to manage your money, we outline a step-by-step approach of how you should approach your finances and lay out a goals-based approach to investing.
After setting up a short term contingency fund, the easiest strategy to adopt would be to outline your medium and long term goals and work backwards to determine how much you should invest at any frequency you wish to achieve those goals.
This kind of investment approach is called dollar cost averaging, in which a predetermined monetary amount is invested every month irrespective of the market price. This kind of investment strategy ensures that you will remain accountable and committed to your goals.
While over time the strategy is guaranteed to work in assets with solid fundamentals, if you are able to understand economic growth prospects, how to value assets, and basic technical analysis, then you may be able to identify good buying opportunities and jump in when there happens to be a blip in the price of the asset.
This strategy is commonly known as buying the dip. Instead of dollar cost averaging, you will only buy opportunistically. While this method is great for ensuring that you do not buy investments at overvalued prices, this method also has its drawbacks in the sense that by waiting, you can miss out on any meaningful run up in price.
When investing in financial instruments like equities, bonds, precious metals and cryptocurrencies using the buying the dip method, it is important to understand that you should never invest all of your dry powder at one go. This is because asset prices fluctuate and while you may get ready to buy heavily at the first signs of a dip, nobody ever knows when the dip will end - this means that you should drip feed into an investment.
When it comes to larger investments like real estate and scarce physical assets like art or watches which involve an initial down payment, it is less common to dollar cost average or drip feed into the investment. In this case, the fundamentals analysis proposed in step 4 becomes even more crucial to identify a good buying opportunity.
For physical assets which cannot be fractionalized and involve one time acquiring costs such as property, precious metals, art, wine etc., then it is important to avoid buying assets at overvalued prices. Only jump in when your estimate of the fair value of the asset exceeds the price at which it is being sold on the market.
When it comes to financial instruments like equities or cryptocurrencies, pick an investing strategy which you are most likely to commit to. If you have no time or interest to periodically assess whether the asset's fundamentals remain plausible, then dollar cost averaging is the best option. But if you enjoy economic and financial analysis, then you will optimize your returns by investing opportunistically.
The more you plan your investment strategy, the more likely it will work out. Yet, as crucial as planning may be, if you do not take action, financial freedom will only remain a dream.
It is also crucial to diversify your investments. Unless you have a crystal ball which illuminates you on the direction of the price of an asset with certainty, putting all your eggs in one basket is super risky.
You can bulletproof your investment portfolio by diversifying across asset classes and within asset classes.
In some extreme cases, diversification may fail to work. When the pandemic caused fear in the markets, all asset classes were down - bonds, equities, crypto, real estate, gold - you name it! But some asset prices fell more than others. Some assets also recovered quicker than others. Being diversified can cushion the negative effects on your wealth during times of turmoil.
It is fine to allocate more capital to the investments you feel have the strongest probability of reaping good returns, but you should also cushion your downside by diversifying your investments.
For those of you who intend to actively manage their investments, it would be diligent to review your portfolio every now and then. This would ensure that your initial investment thesis is playing out smoothly.
If you bought bonds in anticipation of weak economic prospects and low inflationary pressures, it is important to keep abreast with the latest economic and policy updates to ensure your thesis remains intact.
If you bought a company's shares based on certain targets management set, then check whether these targets have been achieved.
If you bought a cryptocurrency based on its ability to solve a problem, evaluate the news around the token. Is its adoption growing? Has its development improved?
If you bought real estate to rent it out, are you earning a good return on the capital you invested? Is the rent earned compensating for the maintenance expenses? If you borrowed to purchase the property, does the rent exceed your loan repayments?
If one of your investments increased substantially and now makes up a significant proportion of your portfolio, it may be time to take some profits and reallocate capital to other investments with higher return potential. This will ensure that you remain diversified.
If you find that you have made negative returns on any of your investments, revert to your analysis in step 4 and see if your initial thesis still holds.
If you are an active investor, it is important to review the performance of your investments every month or every quarter, making the necessary capital reallocation adjustments.
If you invest passively
Irrespective of which type of investor you are, it is always good to remain informed of the latest developments in the asset markets, so subscribe to daily news digests.
Before investing in an asset, it is important to determine the conditions under which you will dispose of the asset. Deciding when to sell before you make the investment will help you remain emotionally detached from the underlying asset, which is crucial to take unbiased decisions.
If you are an active investor, then here are some opportunities when to sell to optimize your returns:
For equities, you may wish to dispose of a company's shares when you no longer believe in the company or the direction it is headed, when you do not approve of management's decision, when the valuation of the company excessively exceeds its intrinsic value or when the overall macroeconomic landscape changes, such as when you bought a stock to combat inflation, but inflation did not materialize as expected.
You would want to reduce the percentage of your investments in bonds when you think that the risk of sustained inflation is high.
When you anticipate real yields to increase, non-yielding assets like precious metals become unprofitable to hold, so you should reduce your exposure to these assets.
You should consider selling your real estate when you observe over-speculation in the property markets, or when the price to rent ratio excessively exceeds the historical average or when there are alternative opportunities to generate a return in more liquid markets.
For cryptocurrencies, there is no hard and fast rule when to sell, especially since several crypto projects are still in their infancy and have insane potential. However a good time to sell is when there is a period of insane hype in the asset, such as when you observe consecutive days of significant increases in the price.
When you sell your investments, you will most likely incur intermediary fees once again. In some cases, such as real estate, the costs to dispose of the investment are higher than those initially paid to acquire the investment.
Also, beware of the tax man! Keep in mind that whenever you sell any of your investments, you need to pay capital gains taxes, which will eat into your returns. But never let the reluctance to pay taxes keep you in an investment which has suboptimal return potential. Planning when to get out of an investment is just as important as planning when to buy.
If you choose to be a passive long term investor, then you shouldn't be bothered with selling until you need to withdraw your investments. If you start investing at a young age, you should have sufficient time to allow your investments to compound significantly.
If you are an active investor, then planning when to sell is as important as planning your buying strategy. However, be mindful of the taxes and intermediary fees you will have to pay when disposing of your investments.
So there you have it. A step-by-step guide to kick-off your investing journey. It may be a lot to process at one go, and although we did our best to explain as easily as possible, the best way to learn is by getting your hands dirty.
Start off small, so that any mistakes you make will also be small. Also, there are many moving parts in economics and finance which make it hard to get your head around and take time to learn. As the great Warren Buffet put it, "investing isn't easy, but it should be simple."
Undeniably, the hardest part about investing is filtering out the noise. Nowadays, we are lucky enough to benefit from cheap and easily accessible trading platforms. But these benefits also bring about more risk and increase the likelihood for rash decisions , especially when liquidity is abundant and when people share their 'get-rich-quick' successes on social media.
That said, if you stick to the investing thesis you laid out in step 4 and remain focused on the long term goal, you should not go wrong.
In my opinion, the step most people take for granted is the fundamentals analysis, and that is why over the next few months we will be releasing how to perform basic fundamental analysis for equities, real estate, cryptocurrencies and precious metals. Do not panic sell your investments when there is fear, but use these periods as an opportunity to continue building your investment portfolio according to your thesis (if it still holds).
We'd like to hear from you. Is there anything which you found unclear? Are there any steps which you feel that we've missed out on? Which assets in particular interest you the most?
Fill out the form on our contact page or send us an email on email@example.com.
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