With rent, utility bills, debt payments and other expenses related to the cost of living seemingly in a state of constant inflation, the best time to start investing was twenty years ago. The next best time is now. If you’ve put it off in the past, don’t beat yourself up; rather put that energy into getting started. If you need a little bit of motivation, understanding compound interest, which Einstein described as the 8th wonder of the world, may help to inspire you.
Let’s assume you’ve invested €100 every month for ten years, and are earning a 10% average annual return. In the end you’ll end up with about €20 000 Euros, of which approximately €7500 is pure profit! That’s the power of compound interest. So, are you ready to get started?
Decide how much you wish to invest
The first thing you need to decide is how much money you wish to invest, which will depend on the goal of your investment and the date you’ve set to reach it. A typical ambition when investing is to retire, if not early, then at least earlier, or better, but other people save up to splurge on a particular item or adventure. If you have a particular date in mind, at which point you’d need that extra cash, then work backwards from your deadline to calculate how much you need to invest on a monthly or weekly basis.
As a rule of thumb, you should aim to invest a total of 10% to 15% of your income each year for retirement. If that doesn’t seem realistic for you now, then start with a more manageable amount and work your way up over time. Once you know how much money you have for the purpose, it’s time to start looking for suitable investments.
If you want to gamble, you have options. Cryptocurrencies, NFTs, even a lottery ticket is an investment of sorts. If you’re happy to disregard valuation fundamentals and put faith in the Greater Fool theory that inevitably someone will be willing to pay more for a dubious asset than you did,
then these typically short-term investments may have some appeal. Do remember though, that for every crypto millionaire, there are countless crypto paupers. The greater the promise of quick, easy returns, the greater the likelihood that you’ll lose all your money.
Open an investment account
Once you’ve worked out how much you want to invest, we’d suggest you create an emergency fund, of between 3 – 12 months worth of living expenses, to ensure that you are never in a situation where you need to withdraw from your investment account when the market is down.
Then it’s vital to familiarise yourself with the costs associated with investment accounts, so that you don’t get a nasty surprise down the line. Usually, you’ll end up paying a management fee, which goes to your investment manager, and also fees charged by the funds you invest in. Total fees will typically add up to about 1% to 2%, which may not sound like much but adds up quickly over time. Look for less expensive options if possible.
Talk to a robot
It may sound ridiculous, but one way to save money on management fees is to consult with an artificial intelligence instead of a nominally real one. A robo-advisor is an AI that uses an algorithm to assess your risk tolerance based on the information you supply it. After asking you a lot of questions, it will recommend investments that fit your means and ambitions. Accounts with Robo-advisors are frequently less expensive than accounts managed by people, and with lower minimum investment limits, you can start smaller, and progress at your own pace.
Consider your investment options
Now we’ll take a look at some of the different financial interests popular with new investors, providing a quick definition and review.
Also known as equities, stocks are shares of the ownership of a particular company. The price of a stock will depend on the company, and range from pocket change to a small fortune. Stocks can be purchased through mutual funds, which are multiple investments that are sold as a package. These funds can be very useful, as they bundle a diverse collection of stocks and bonds, spreading the proverbial eggs into multiple baskets and lowering your exposure to concentration risk in the process.
While some mutual funds are managed by professionals, others simply follow the performance of a specific stock market index, such as the S&P 500. Known as index funds, they are less expensive as there are less fees to be paid.
Companies and governments issue bonds as a means of raising capital. When you purchase one, the seller promises to pay you back the amount spent in a given number of years, with interest. So in essence, it’s basically a loan.
Bonds are typically less risky than stocks, because the repayment timeline is fixed, as is the interest. But when the risk is lowered, often the potential returns are too, and this is usually true of bonds as well. Consequently, they shouldn’t form too large a part of your long-term investment portfolio, unless you prefer a highly conservative approach.
ETFs are similar to mutual funds, in that they consist of multiple investments bundled together, but unlike mutual funds, they are traded throughout the day and for a share price, which is typically lower than the minimum investment requirement of a mutual fund. This makes them an excellent option for investors on a tight budget.
It’s important to note, at this point, the importance of diversifying your portfolio. This means investing in a wide range of different, uncorrelated assets across industries, markets and funds. Doing so mitigates risk by ensuring that if one of your investments loses value, or a particular market or industry goes into recession, your portfolio doesn’t follow suit.
Academics using advanced mathematical models have determined that a well diversified portfolio of around 25 to 30 uncorrelated investments should serve to effectively mitigate risk. When it comes to how many investments you should have at once, there is no magical number, but always remember to diversify your portfolio over the sectors you want exposure to, while allocating a substantial amount to fixed income instruments to hedge against any downturns in individual companies or sectors.
Pick an investment strategy
Your strategy will depend on your goals, your available resources, and your time horizon. If you only intend on withdrawing decades down the line, then investing in stocks though a low-cost stock mutual funds, index fund or ETF may be your best option.
If you have shorter term goals (less than two years), however, then it may be wiser to keep your money in an online savings account, or low-risk investment portfolio, earning around 0.7% interest. These options are low risk, low reward, so barring any disasters, your money should be safe.
For slightly longer term goals (2-3 years), Short-term bond funds, especially those with a concentration of government issued bonds, are a good option, offering a potential interest rate of 1% to 2% or more.
For long term investing, in addition to stocks, consider Bank certificates of deposit (CDs), money market instruments issued by banks to raise funds from the secondary money, which pay out a fixed rate of interest over a specific period of time. Another excellent option is investment in peer-to-peer loans, like the ones found on the Estateguru platform.
If you’re willing to lend money to borrowers in need of quick cash to get their business or project off the ground, you could earn over five percent interest on your loans (Estateguru’s historical annual return is over 10%!). Peer 2 peer platforms will assign their borrowers scores based on their creditworthiness, so investors can limit their risk by choosing those projects deemed less risky than others.
Estateguru secures all their loans (secured loans have collateral: an asset that can be liquidated to partly or fully reimburse lenders in the case of a default) with a mortgage on the borrower’s property, which means that lender’s are exposed to significantly less risk than with unsecured loans. The platform also offers investors the opportunity to automate their investments with an ‘Investments Strategies’ feature that serves to quickly reinvest returns into projects diversified across multiple markets, ensuring your money is constantly out there working for you.
You can read more about how our Investment Strategies feature works, here, or for more tips on how to build your own bulletproof portfolio, read this article by our Finnish Country Manager, Matti Vansén.
All investments, including real estate, are speculative in nature and involve substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.