If you are new to the game of investing, it can be considered quite risky unless you know what you are doing.
This is the video Ali wished he had when he first started investing five years ago.
My notes can be found below.
On Why We Should Invest
Thanks to a thing called inflation, money loses its value over time, at a rate of approximately, 2 – 2.5% per year.
This is why we should never save our money in a bank, or anywhere else for that matter.
If you were to store your money under your mattress for a long period of time, every year that money will be worth less and less because of inflation.
If we can invest our money in a way that can match the rate of inflation our money won’t lose value. If we can invest our money with an interest rate that is higher than the rate of inflation, we can make investing profitable.
How Do We Make Money Investing?
If, hypothetically speaking, you owned a savings account that gave you a rate of interest of 10% per annum (it doesn’t exist), you would earn 10% profit on the total value of the money, over the term that money is stored in that account.
For example, if you made a deposit of $100 at the start of the year, and took it out at the end of the year, you would make $10 on top of the $100 you deposited.
If you then kept that initial $100 and the accumulative profits in that same savings account for a furhter 10 years, that $100 would now be worth $259, thanks to compounding interest.
Compounding interest is where you earn 10% on not only your initial $100 investment, but also the profit gain each and every subsequent year.
So, if you earned $10 in your first year of investment, you new investment value will be $110. In year two of your investment, you will now make 10% on $110.
Each and every year, as long as your money stays in that account you money will compound, and you will earn profit on the new value.
Unfortunately because most savings accounts offer less than 1% per year, we will lose money over time from savings alone, because of inflation.
This is where investing comes in.
On What Investing Is
Simply put, investments enable you to increase the value of money that you hold. Investments could be in the form of business assets, paper assets (stocks, index funds), real estate or commodities.
For exampleIf you were to buy a house , that property would be an investment if:
- You rented that house out to tenants and made a profit after expenses every month, or
- You made a capital gain (your house is worth more now than when you bought it) when you sell the house
Whilst rental properties can be very good investments, they are quite high maintenance and require a large amount of capital to get started.
Therefore, as a beginner investor, paper assets (shares) could be a better option.
What are Shares?
When you invest in shares, you are essentially buying a part ownership in the company. If company is successful, over time, your shares increase in value.
You can make money from shares in two ways:
- Dividend Payments: Where a company pays a portion of the profits to shareholders, based on the earnings in that financial year
- Capital Gains: If the value of your share have risen over time, you make a capital gain, when you sell.
Shares can be bought from an online stock broking service.
You can buy shares from a stock broker, and these days will likely an online service.
Ali doesn’t advise investing in individual stocks, because of risk. Instead you should invest in Index Funds.
“Index Funds are the best, safest and easiest long term investment strategy for most people”Graham Stephen
On Index Funds
In index fund is made up of two parts. The fund is where a group of investors pool their money together to be managed by a fund manager. This fund manager then decides where the money is going to be invested. The index refers to a specific group of companies within the stock market that a fund manager will invest in. Examples include:
- FTSE 100 Index
- S&P 500 Index
- Dow Jones Industrial Average
Index funds are good because they generally rise over time. See the graph for the S&P 500 Index below as an example.
Ali Abdaal invests primarily in the S&P 500 index.
Index funds are a good investment for beginners because:
- They are easy to invest in
- The provide a decent amount of diversification
- Index funds tend to have very low fees
Warren Buffet once said, if he were given $100,000 to invest, he would invest in an Index Fund. It’s actually quite difficult to beat the market with an actively managed fund, and they charge more on fees.
On Risk and Getting Started
The only way to lose money in anything is to buy stocks, and then sell it for less than what you bought it for. Investing is only risky if you do that, or invest in single stocks.
You shouldn’t be really putting any money into stocks or shares that you may need in the next 5 – 10 years. If you keep your money in a S&P Fund, generally over the long term, you should earn around 10%.
Investing is only risky if you are cash strapped and thinking short term.
When Should you get Started?
Start investing as soon as possible, but:
- Make sure all debt is paid off
- You have an emergency fund of 3 – 6 months in cash
- Don’t put any money in stocks that you may need in the next three to five years
As they say on the Motley Fool there is no way your future self will ever regret the decision to invest.