How to start Investing? 3 Rules to learn how to Invest

How to Start Investing?

Key Takeaways

  • 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
active management - global stocks beating the S&P 500 over one and two year basis societe generale
Source: Societe Generale Research. Since 2017 barely one in five stocks globally have managed to beat the S&P 500

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 among some of the smartest Retail Investors within Bogleheads and FIRE Community some are taking a gamble from time to time.

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
how to starting investing - 90% index investing and 10% stock picking
Percentage of My Assets allocated to Stock Picking

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

“It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world.”

Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

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?

investment aspects - how to learn investing - investing is single stocks vs index investing and etfs

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!)

how to start investing - losing money is not symmetricc
Source: - The math is simple and brutal. By losing money not only are you not making compound interest as you will read below but you need exponentially better returns going forward to just make it back to the initial position. E.g. If you invest 100 and you lose 50% you start with 50 that needs to double (100% return) to get back to 100.

Rule #2 - I let time be my biggest Ally

One reason why Buy & Hold pays off (and Warren Buffett keeps winning)

Learn how to invest - how to start investing a profit from compound interest
Source: - Assumes annual payments. If getting interest or dividends more frequently the effect is even larger. Keep reinvesting Income - you can imagine the consequences of losing money - time is your ally and that's why Warren Buffett hates losing money - Don't do stock picking - it is not sustainable (you can't repeat it over and over again, with ETFs you can).

Einstein famously said compound interest is the 8th wonder of the world. You understand that people who bet on single name stocks won't be able to outperform in the long term. They may also quickly lose money. As a result they are incurring a massive opportunity cost. Einstein concluded: "He who understands it, earns it … he who doesn’t … pays it"

Buffett's first rule is based on that concept. "My wealth has come from a combination of living in America, some lucky genes, and compound interest."

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
risk aversion and time horizon - jp morgan Dalbar study Quantitative Analysis of Investor Behavior jp mogan
Source: Dalbar, JP Morgan

... 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)
bond etf or gold etf protection? asset allocation is key especially for shorter time horizon when 100% stocks portfolio is not always safe
You have no control over market returns and government policies. You have limited control of how long you will live. But you have total control over savings and whether you will allocated investments to Equities, Bonds or other assets and their proportions. Source: JP Morgan Asset Management

How do you manage the 90% ?

"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."

George Soros

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

While there is not substitute to seeing how you really behave during a Stock Market Crash you can take a questionnaire to better understand yourself e.g. the Vanguard Investor Questionnaire

I follow the below boring process

bond etf gold etf portfolio protection

But what is 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)

fixed income etf gold etf must be added to portfolio to avoid losses - diversification for short term investment horizon
Source: - Returns can be negative for a 5 year Holding period if you ONLY invest in Stocks without protection

Objective of this Website is focused on the protections you can put in place to get a smoother ride to high returns

- Raph aka Banker On Wheels

Start your Investment Journey and earn Passive Income - Wise Investing is relatively simple!

Start by reading what Wise Money Investing is all about and how to avoid traps and then browse through my guides to understand what consistently works over time


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Good luck and keep’em* rolling!

(*Wheels & Dividends)




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10 months ago

Sound principles for long term returns

7 months ago

Thank you, BoW for the amazing work you have done to collate and explain financial research that we’d take years to collate, understand, and implement.
I can personally attest to the success of your recommendations, as I’ve followed the same strategy over the past decades.
For your website, I have one suggestion for investors with some experience: Read just the bolded headings. That way, you’ll get the big picture quickly. If you wish, you can then dive deeper into data by reading the paragraphs under the bolded headings.
Thank you again!