How to Start Investing?
- If you are just starting out, it can all get a bit overwhelming
- Below is my personal view on how to best learn how to invest, get passive income but also invest in Stocks where you have strong convictions as we all may have some edge in a certain field
- If you have experience investing and follow a similar investment philosophy I’d suggest to jump straight to the Guide section
Stock Picking - The Elephant in the room
Likelihood of picking the right stocks
Stock Picking is fun but it's a loser's game
You want to pick stocks; you want to invest in the technology sector because you work in the technology sector. You want that dividend stock that you think will do well. You want Tesla or jump of the latest trade from El Presidente (that said he still only gambles with 5% of his net worth!)
Even Pros ignore research and pick stocks
- Worse, most professional Investors including the most prestigious ones I worked for like to gamble with their personal savings and ignore the financial theory
- You could argue all active management is gambling but while this makes sense to make overall markets efficient there is also a reason why passive investments are so successful – they just win in the long run
5 to 10% for Gambling
My Golden Rule - 90% of Savings in Index Investments and 'gamble' with the rest
While Passive Investments work active bets keep me excited when I log into by Broker account and that’s just human nature. We need a bit of thrill.
Up all night to get lucky
Most people simply ignore all the work that active Investing (aka Stock Picking) requires. There is a whole process behind it you can see below. There are millions of people doing it on a daily basis some much smarter and with better technology than most and still can’t beat the indices (because luck plays a bigger role that many want to acknowledge)
Below is part of the answer but most Investors still stay up all night to get lucky
What could (possibly) go wrong?
What about 90% of your wealth?
I essentially follow 3 simple rules, that are easy on paper but hard to implement for people looking for instant gratification
Rule #1 - I don't allow myself to lose the 90%
Exponential consequences of losses (Never lose money!)
Rule #2 - I let time be my biggest Ally
One reason why Buy & Hold pays off (and Warren Buffett keeps winning)
Rule #3 - I focus only on things that are in my control
Why do most people fail at investing? (You can't time the market!)
Buy and Hold is probably the toughest investing strategy. Emotions always want to take control. Investors (sophisticated or regular savers) think they can time the market.
Th below graph is a sobering reminder of the potential costs of market timing. By missing some of the market’s best days, investors can lose out on critical opportunities to grow their portfolios with devastating results. Six of the 10 best days occurred within two weeks of the 10 worst days. This study shows that over 20 years, the average investor has achieved a 1.9% annualized return as compared to over 5.5% just by staying invested in an Index Fund (before fees)
20 year annualized returns by asset class 1998 - 2018
... and waste time on things over which they have an illusion of control
- Perhaps, you follow Stoic philosophy or did meaningful research and understand there are lots of aspects in investing (and life!) you have no control over (despite what most investors think). I try not to ignore the role of randomness in markets
- Did you know that the Pareto Principle also applies to investing? What does it mean? Stock picking has almost no influence over long term returns. It’s been researched heavily and proven correct. Crucially, the decision whether you allocate 60% to Equities as a whole (e.g. S&P 500) and 40% to Bonds will matter much more than picking individual stocks (in fact, allocation to the right asset class determines over 90% of overall investing performance)
How do you manage the 90% ?
I define my Time Horizon
When will you need your money: is it 1 year, 5 years or 10+ years?
I try to understand my Risk Tolerance
I follow the below boring process
But what is Bankeronwheels.com all about?
- You know that Index Funds are the best way to get exposure to Stocks which generate passive income (excellent piece on this here).
- Index Investing works consistently over and over again. In fact, Warren Buffett instructed the trustee in charge of his estate to invest 90 percent of his money into the S&P 500 for his wife
- Stocks only go up. Over the long term e.g. 15+ years. However, this is not bullet proof strategy when have some risk aversion and/or when your time horizon is shorter (e.g. 5 years)
- Because of shorter time horizon I may look for Stocks Portfolio Protection
Investing in Stocks can be risky over a short and medium time horizon (look at the simulations over the past 30 years)
Objective of this Website
Start your Investment Journey and earn Passive Income - Wise Investing is relatively simple!
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Good luck and keep’em* rolling!
(*Wheels & Dividends)