Why should you invest?

Investing allows you to grow your money significantly over time thanks to the power of compound returns.

Compound interests are sometimes called the Eighth Wonder of the World. With the power of capitalization, a single penny could become millions of dollars, with enough time and a large percentage of interest. You can not live so long for this to happen, but all the same.

Let’s say you start investing when you’re 16 …

As unrealistic as it may seem to start investing, let’s say you have a small legacy and you decided to invest it – if you put 5,000 € in an account with an interest rate of 7% and 200 € per month, after 30 years you will have a little more than 264 000 €.

Using a more realistic example, let’s say you start investing when you are 22 years old when you leave school …

You are just starting to put € 100 a month.

If you increase the contributions by the same amount as any salary increase you get, you will have more than $ 1 million at age 65. This implies annual increases of 3.5% and a return of 8.5% on investments. Of course in the real world you risk putting on the odds when you are young and without children and after when they are grown up.

Although there are several factors to consider, a simple example like this demonstrates the power of compound interest if all goes well.

So, if you want to start saving now, you could even have a whole year’s salary saved by the time you reach your 30th birthday …

When should you invest?

Now that you know why you should invest, why not invest now? The right moment is now.

Investing seems more intimidating than it really is. Yes, there is always a potential risk of loss, but there is an even greater potential for gain. The real risk is never to invest, because you have a 100% chance of winning nothing, whereas if you invest, you have a percentage of chance to win.

Doing anything for the first time can be terrifying, especially when it comes to your hard-earned money. But here are some tips for novice investors.

What you need to know :

Risk and return

It’s true: Investing involves risks. We have all heard stories of investors who have lost half of their fortunes in the Great Depression or the subprime crisis. We have heard about the Madoff Bernards of the world and investors who have lost everything in a scam. Although you can never completely eliminate the risk, you can significantly reduce the risk if you invest wisely by dividing your investments.

The great thing about investing as a young person is that you probably invest in long-term investments, like your retirement account. These investments are less risky than trading in fast-moving (trading) stocks by people who really do not understand what they are doing.

Although the investment may be risky, it is better to simply manage that risk, because not investing can cost you a lot more money than losing a little money on a bad investment. Indeed compound interests are very powerful.

The success of compound interest is that the sooner you start saving and especially investing for a long time with good returns, the more your money will increase over time.

Compound interest

Compound interest is the addition of interest to the principal sum of a loan or deposit, or, in other words, interest on interest. It is the result of the reinvestment of the interest, rather than paying it, so that the interest in the next period is then earned on the principal sum plus the interest previously accrued. Compound interest is standard in finance and economics.

Compound interest can be opposed to simple interest, where interest is not added to capital, so there is no capitalization. The simple annual interest rate is the amount of interest per period multiplied by the number of periods per year.

How to invest?

Investing is actually quite simple; Basically, you put your money to work so that you do not have to take a second job preparing for your retirement buying a house or even financing a child’s education. There are many ways to make an investment, such as stocks, bonds, mutual funds, crowdfunding or real estate, and you do not always need a lot of money to start with.

Of course, you have to qualify according to your risk appetite and your investment horizon. However there are some basic rules and there are special cases, we will here mainly talk about the basic rules.

The first thing is you know yourself, we do not tend to invest in the same way at 18 years old than at 50.

As said before, an investment with 3 characteristics risk, return, liquidity

Before investing you need a fund easily accessible for example on a booklet A, it should be between 3 and 6 months of your needs just in case.

 

There are tons of investments and I will quote some at the end.

Step 1: Observe your finances

Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. In addition to the cost of living, payments made on credit cards and loans can reduce the amount of money remaining to be invested. Fortunately, investing does not require a large amount to start.

Step 2: Learn the basics

You do not need to be a financial expert to invest, but you need to learn some basic terminology to be better equipped to make informed decisions.

Investing can be bad for your money and can lead to your loss or the loss of your savings if you do anything. Learn the differences between stocks, bonds, peer-to-peer lending, cash notes and other products. You should also learn financial theories such as portfolio optimization, diversification and market efficiency.

Reading books written by successful investors such as Warren Buffett or reading the basic tutorials on Wealth and Finance are excellent starting points.

Step 3 Define your goals

Once you have established your investment budget and learned the basics, it’s time to set your investment goal. Even though all investors are trying to make money, everyone comes from different backgrounds and needs. Setting a goal helps determine the best investment vehicle to meet that particular goal. For example, when saving for retirement, a business savings account should probably be used. Capital security, income and capital appreciation are factors to consider; what is best for you will depend on your age, your position in life and your personal situation. A 35-year-old businesswoman and a 75-year-old widower will have very different needs.

Step 3: Determine your risk tolerance

Does a small drop in your overall investment value make you tremble? Before deciding which investments are right for you, you need to know what risks you are willing to assume. Investments that carry more risk (exotic investment, for example) offer better return potential, but a higher risk. Conversely, low risk investments generally offer a lower rate of return. In the perfect scenario, an investment portfolio that has a high return with little risk is the goal for any investor. Your risk tolerance varies depending on your age, your income requirements and your financial goals.

Step 4: Find your investment style

Now that you know your risk tolerance and goals, what is your investment style? Many new investors will find that their goals and risk tolerance often do not match. For example, if you want to make a quick fortune, but you want capital security, it is better to take a more cautious approach to investing. Conservative investors will typically invest between 70% and 75% of their money in low-risk fixed income securities such as treasury bills, 15% to 20% of which are dedicated to large companies.

Step 5: Learn what are the fees

It is also important to know the investment costs, because some costs can reduce the returns on your investments, including taxes in real estate. Overall, passive investment strategies tend to have lower fees than active investment strategies. Stock brokers generally charge commissions. For investors starting with a smaller investment, life insurance can be a good choice. On the other hand, if you buy mutual funds, keep in mind that the funds charge a variety of management fees, which are the cost of operating the fund, and that some funds charge an entry or exit fee. exit.

Step 6: Find a mentor or advisor

The type of advisor that’s right for you depends on how much time you’re willing to invest and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, the amount they charge, the amount of information they plan to communicate with you, and the additional services they can offer.

Step 7: Choose Investments

Now comes the fun part: choose the investments that will become a part of your investment portfolio. If your investment style is conservative, your portfolio should consist primarily of low-risk, income-generating securities, such as treasury bills and money market funds.

For those who do not want to choose stocks or individual bonds, you can turn to P2P lending. The key concepts to emphasize here are asset allocation and diversification. In asset allocation, you balance risk and reward by dividing your money between asset classes: equities, fixed income and cash, real estate and the rest.

Many of us delay investing (or not starting at all) because we are intimidated in choosing investments or we are afraid of risk. An automatic investment plan can help. One of the techniques I describe here does not require investment knowledge – it’s as easy as opening a bank account. In autopilot, you avoid investing in your emotions, which can temper your fear or at least limit the ability of fear to cost you money. Let’s look at how an automatic investment plan does that.

The technique of buying a fixed amount of investment at regular intervals is known, it is effective in smoothing market fluctuations. Example you buy every month 50 € of the same life insurance.

By diversifying the different asset classes, you avoid the problems associated with “putting all your eggs in one basket”. For example, investing in a single stock is very risky for an investor. However, investing in 10 stocks reduces the risk on 10 different companies. Investing only in pharmaceutical companies is riskier than investing in the broader stock market. Investing in equities is riskier than investing in equities, bonds and cash.

Step 8: Keep your emotions elsewhere

Do not let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in the overall value of your portfolio. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold his position for too long in the hope of an even higher price – even if it drops for example on the eve of a CAC at 6000 points.

Fear can cause an investor to sell an investment too soon, or prevent an investor from selling a losing investment. Successful investors remain disciplined and are not influenced by daily fluctuations or external factors. The ultimate goal of any investment is to buy low and sell high. However, most failed investors negotiate with emotion, buying unknowingly and selling little. If your wallet prevents you from sleeping at night, it may be better to reconsider your risk tolerance and take a more conservative approach.

Step 9: Adjust and repeat

Deming’s wheel in a way, in short you start an investment cycle, as you progress in skill, you should theoretically have higher returns or less risky (on the other hand the economic situation can deteriorate, so in the end you could be at the same point.

Invest for the first time

Investing is like a religion – people have strong opinions and can even belong to one of the many sects or schools of thought. Here are some that come to mind:

The pessimists – investing is like a casino, they do not master anything and do not understand anything.

Followers of the end of the world – these people are convinced that our financial system will collapse, so they put all their money in gold and real estate.

Small Traders – these are the most often people you see in movies, with their desks or walls covered in monitors and TVs, watch every second of the day and see how the stock market is changing.

Indexers – these are people who simply invest in everything to take advantage of the slow and steady increase in the overall value of the markets.

The methodical investors – they invest in a few projects, twenty diversify, but not too much, they do not all earn millions, but their strategy is sure.

The followers of the real estate or the stock market, they swear by this.

False geniuses – they invest and think to make a fortune in a bull market, but find themselves naked during the declines.

What are you investing in?

Create a broad diversification through a combination of low-cost mutual funds consisting of stocks, bonds, real estate and personally, I also have a soft spot for crowdfunding while retaining 3 months of cash.

The most important factor for being an investor is not just choosing stocks and funds. A successful investment depends on:

Choose the right asset mix – the overall mix of bonds, stocks and cash you hold in your portfolio.

Large investment classes

There are many investment classes, but I will mention only the most familiar ones that make up the bulk of a typical portfolio.

stock

Shares that allow you to hold a share of the capital of a company, you hold a piece of the company and so can decide as well as get a share of the dividends.

The obligations

The bonds are debt, basically you lend for interest.

The exotic ones

Metals, rare earths, raw materials, wheat …. There are plenty of them and they seldom make up a large percentage of a portfolio.

real estate

Often associated with the main house, you should not forget that your house does not earn anything until it is rented, otherwise it saves the rent … after that is calculated.

Investment vehicles

To buy investments there are several solutions, I only mention a few.

Life insurance

A mutual fund is a professionally managed type of investment that pools your money with other investors. The fund managers then use the pooled money to buy securities for the group.

It’s best to start investing in mutual funds rather than individual stocks and bonds until you become more experienced. These types of funds allow you to invest in a broad portfolio of stocks and bonds in a single transaction.

These are not only safer investments (because they are diversified), but it is often much cheaper to invest in this way. You pay a single trading commission or just the management fee as opposed to paying commissions to buy a dozen or more different shares, this is handy for the smaller portfolios.

Salary savings, a good choice

A PEE and other device provides some benefits as an incentive to save for retirement. The disadvantage is that there are limits on how much you can contribute to the account each year and when you can withdraw the money.

The first advantage is obviously the matching, if the company decides to grant people participating in the program the financing of this supplement of savings.

The second relates to taxation, since the worker finds himself exempt from the payment of social security charges, and the income tax on the employer’s employer’s contribution and the totality of the sums received.

Buy your shares by the piece

If you decide you want to venture and buy individual stocks, we recommend taking a slow and steady approach. Do not place more than 10% of your portfolio in individual stocks until you are comfortable with what you are doing. The best time to invest in one go is right after a crisis, otherwise prefer a regular investment.

It’s important not to be afraid of the stock market, it’s really one of the best places to grow your money.

Immovable

Real estate investing makes millionaires (look at Donald Trump), but you do not have to be a millionaire to start investing in real estate.

Investing in real estate is a long-term investment in which investors invest to get cash (the money you earn from rental properties every month after all expenses have been paid). Cash flow will also increase over time, as rents will increase with inflation, while your mortgage payments will stay the same.

Like any investment, however, it is important to know the risks.

Crowdfunding

With online investment sites such as Bondora you can earn low risk 6.75% p.a. without even knowing the basics of investment.

Should you make your own choices or should you get help with your investments?

It is important to know when it is best to have a financial advisor and when it is best to do everything yourself. If you are looking for real financial advice and you have a lot of money to manage, a personal advisor will explain you a lot better.

Some people may choose to invest with a financial advisor because they want an interaction with a person, professional advice, and they do not mind paying a premium for someone handling their money. Often, people who have large amounts of money to invest rely on a financial advisor to avoid having to do the job.

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