By Sorin Rizeanu, University of Victoria
You’ve likely heard of Minecraft. It’s a simple game where you slowly place blocks and craft items from containers to castles and entire cities. You’ve probably also heard of the first-person shooter Call of Duty (COD), where players navigate fast-paced war zones.
Like gaming, investing is all about how you approach it. You can build slow but safe, like in Minecraft, or you can go fast and risk more, like in COD.
If you’re a young person who has just gotten your first paycheck or saved a tidy sum from your first job, you might be thinking about how to invest your money.
However, the stock market can be a daunting place. Fortunes are built and lost in days. You can take the fast approach and risk it all on getting the big win. Or, with the proper temperament, you can build a significant source of additional income one block at a time. But where to start? And how does it all work?
Investing 101
You’ve probably heard of investment apps like Robinhood or Wealthsimple, or ones like Coinbase that allow you to invest in crypto currencies.
Free Reports:
Investing is pretty much what you make of it. It can be like Minecraft, slowly placing blocks to develop a long-term diversified set of assets through investment funds, like exchange traded funds (ETFs) or mutual funds.
Most investment funds hold portfolios of stocks, bonds and other investments. ETFs trade on exchanges just like stocks, and most passively track an index, with little or no active management by fund managers. Mutual funds are more actively managed and they generally have higher fees than ETFs.
If you’re more of a risk-taker, investing can also be fast-paced like COD: shooting with options, penny stocks, crypto and other speculative tools.
Similar to gaming, you are only one participant in a much bigger world. There are days when you will lose and days when you win. Strategies that work in some situations but not in other situations. Expert players and novices.
If you’re completely new to things, try out an investing simulation. Some trading platforms allow you to use a version of their app or website where you can make simulated investments. Some of them are free or cost around $10-$15, like TradingView and eToro. MarketWatch even lets you create an investing game that you can invite your friends to participate in.
Next, you’ll need an investment account. Most big banks offer self-managed investment accounts. If you want to save a bit, check out discount brokers that charge lower or no commission (but read the fine print and know what other fees they might charge you).
Be sure to check out any tax-free investing accounts available in your country, like the TFSA in Canada or Roth IRA in the United States. These are a valuable way to grow your net worth without paying additional tax.
What kind of investing should I get into?
Take a lesson from Bob, the world’s worst market timer. He starts investing at 22, and every time he does, the market crashes. You’d guess he loses all his money, right? Not really, over his working life Bob invests $184,000, but ends up with a total of $1.1 million at retirement.
How? Bob put his money into an S&P 500 index fund and kept it to retirement, through good or bad.
The moral of the story is that you don’t have to be lucky or very savvy. Most important is to have a diverse portfolio and stay in the market. Don’t sell or buy in a panic, keep contributing. Buy diversified funds, rather than individual stocks, at least in the beginning. Then, as you learn, you can pick stocks and even invest part of your portfolio in riskier assets.
You still have decades to slowly get your millions.
Some strategies that have proven their worth
The value investing strategy, made famous by financial analyst Benjamin Graham and championed by the likes of American investor Warren Buffett, is summarized by with the motto: “This too will pass.”
Basically, pick a good company, in a moment when it’s undervalued for some reason: bad news, lost contract, temporary mismanagement etc. Buffett has likened good companies to castles with a deep moat around them – that is they have a competitive edge durable in time, an unique product, customer loyalty or pricing power. Think Apple, American Express or Coca Cola.
The growth investing strategy, championed by fund manager Cathie Wood, tries to identify companies whose earnings will grow very fast (but could crash equally fast). Companies like Tesla, Coinbase, UiPath, Roku etc. AI has given a huge boost to this strategy recently, but in long term, it’s hard to tell if it’s better than the value strategy.
A different approach, favoured by investors that prefer a more stable stream of income, is the dividend strategy. Dividends are the money distributed to shareholders from company’s profits.
Historically, dividend stocks have outperformed the S&P 500, and with less volatility. Think about it: you get a return on investment from stock price growth as well as dividends that you can reinvest.
In sum, pick a strategy that fits you and get to work. You can pick stocks, or you can pick diversified funds. As investor Peter Lynch insisted, “know what you own, and know why you own it.” Invest in stocks or funds whose business model you understand. Love cars? Study different manufacturers, see what different companies are working on, what customers like this year, and figure out who’s making money before quarterly statements are pointing out the winners and losers.
What should I be careful about?
Many new investors buy on the hype. Imagine there’s some good news coming up about Tesla. You wake up, and while having your coffee, you see the news and buy the stock.
But think. Investors following TSLA already know what the article is about. By the time you’ve read the news, people with deep pockets on Wall Street are already placing their bets. By the time you buy the stock, the market will have already integrated that news and now the price will probably go down.
Same with the long-term hype: when your cab driver is giving stock or crypto advice it’s time to get out of the market.
Another pitfall is the quick money, speculation, dopamine addiction. Subreddits like r/wallstreetbets provide many great examples of this. If you turn your life into a casino, you will win some times, but in the end the house always wins. A bet here and there can be fun though.
As a young person, you have an advantage: time. As you get older you will understand the long-term trends and market drivers — economy, geo-politics, innovation and so forth. As you progress in your career, you will understand more about your industry and this too may turn into profits. Over the years, eight per cent per year, with compounding, goes very far.
Finally, as ethical people, we need to walk the talk. We can’t pretend to want to save the Earth if our money is going to heavy polluters. Beware of pretenders — many are just deceptively mimicking behaviours to get high environmental, social and governance scores.
Research well your investment and its entire supply chain. Think about what goes into making the product, the people behind it and what impact it has on our world. Are you morally comfortable giving your money to certain companies?
Put in the time and don’t rush in, some investments are for life.
About the Author:
Sorin Rizeanu, Assistant Professor, Gustavson School of Business, University of Victoria
This article is republished from The Conversation under a Creative Commons license. Read the original article.