How I started investing
Obligatory disclaimer: I’m no financial advisor, the views portrayed here are my own and do not reflect any investment or financial advice. Please consult with your financial advisor when investing.
Intro
At the age of 16 I started to play around with investment apps like Investopedia. These were great apps that used fake money for you to get started and understand concepts. I started to “read news” and “figure out the best time to put the money” in some of these companies. I went from the most common ones to the most random companies ever. It indeed was fun, I learned a lot, specially what NOT to do… :)
I decided that by the time I turned 18 I would open my brokerage account and started investing real money.
Well.. it wasn’t until I was 21 that I actually started.
This is my journey of how I started, what I learned and what personally has worked for me!
The beginnings
In 2017, I started my job at Microsoft as a software engineer. I decided that it was time to read some books and start to invest some money. I read TONS of books…. well.. not really, I only read “A random walk down wall street”.. and that pretty much sums up my investment strategy until this day 😃. Joking aside, I did stay informed by reading reddit/personalfinance, following @personalfinanceclub and conversating with friends to learn about new concepts every now and then. If you put your mind to something, you can get knowledge and information from lots of different places in the internet these days, just make sure you get the right one!
It took me a bit of time because I thought I needed a specific amount of money to get started. I figured if I didn’t invest more than $1000 then it was useless… WRONG. I was completely wrong. In fact, if I had started when I was 18 and invested just 10$/month in the S&P500 I would have doubled my initial investment by today (around +$900 ).. BUT, let’s not dwell on the “what ifs”. If I’ve learned something is that regret is the worst enemy when it comes to investing. Regret will make us act irrational and that is the last thing you want to do when moving your money around.
So, back to 2017. I started familiarizing myself more and more with techniques, concepts, how taxes worked, what a broker was, different investing apps, etc. Because I was starting, I didn’t want to go into the offensive and be extra risky. Between “A random walk down wall street” and some of the other learning articles, the common consensus was to “invest what you can afford to lose” and “invest as long as you are able to sleep at night”. I really liked those concepts as a way to get started and invested my first $50 in the S&P500! (We’ll get to that in a second).
I love to sleep and more so, peacefully, so I decided that I wanted to be very hands-off this process and don’t overthink the decisions I’d made. I wanted to make sure I invested in something not risky and also, carry that mentality for the future, altering it a bit as I go. That is why I started on the S&P500.
Getting technical
Before explaining what the S&P500 is, we must first understand what is a stock market index.
A stock market index is an indicator for how the market or a subset of the market is performing relatively to the stock prices of the companies the index is tracking.
In other words, with an index, one can easily see — via a plotted chart for example — how the market has performed over a period of time.
The Standard and Poor’s 500 — S&P500 — is an index that tracks the performance of the top 500 companies listed on stock exchanges in the United States. Take a look here for a complete list (note, this may change over time). Overall, this is a well-diversified index where large, reputable companies are tracked.
Now, an index is just an indicator. You cannot invest in an index as it is just a tracker for these companies. However, there are easy ways for you to invest in an index fund which essentially mimics the specific index you would like to track. For example, take a look at Jeremy’s Personal Finance Club image (highly recommend following him for more investment concepts!).
There’s several index funds from different companies that track the S&P500, personally I like to go with the vanguard one: VOO.
As I went along, I started to take more money from my paycheck and invest small amounts of it. Another misconception is that investing is hard because finding the right time to buy a stock is complicated. There is an old adage that says “it’s not about timing the market, but about time in the market”. This means that it’s no use to try and find the most optimal time to buy a stock. One might wait endlessly for that or even worse, buy something and have an enormous amount of regret when the price decreases 2 hours later.
“Invest early, and invest often” is something I heard long time back and it deeply resonates with me. The whole power of investing boils down to a very simple concept.. time. Time is your best friend when it comes to investing. In fact, investing revolves around time by a very simple formula which Albert Einstein once praised.
Put simply, compound interest is the principle by which an amount of money earns interest over time. However, the beauty of it comes from the fact that interest is gained on the initial interest. And subsequent interest is also gained on the previous interest, making a compounding effect.
Albert Einstein once said: “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Let’s look at an example:
Let’s assume I invest $100 on an index fund which will give me 10% interest after one year. After the first year I would earn 10% on the $100 = $10.
Meaning, after one year my balance would be $110!
When the next year finishes, I will have gained another 10% **on $110 (**previous amount with interest), making my total balance = $121 (110 + 11).As you can see, the money is not accruing a 10% interest every year solely on the initial investment. It’s actually doing it on the earned interest as well!
Investing a larger quantity will sure give out more money, however, the key here is time. Letting the compound interest formula take effect over a long period of time will have exponential rewards.
I highly encourage you to take a look at this link and play with the calculator!
❔ But Kevin, what is the market’s interest rate? What value should I substitute in the above calculator?
Ah.. The million dollar question. The market fluctuates. There may be years where the returns are more than 20%! Similarly, there may be years where the returns are -20%, meaning, the market decreased in value. Nobody can predict the exact market return for a given year. If anyone tells you they can guarantee it, they are lying.
However, based on historical data (the past 30 years) — which does not guarantee future results — the market has given an annual average returns of 10% to investors (not accounting for inflation). The S&P500 index has given the same returns more or less. While it may not seem lucrative, remember our formula above when computing the values for this rate of return.
Final thoughts
In the world of investing there is a lot of speculation. People invest in the stock market with hopes that in the future they can sell their stocks at a higher price, purely based on what people think and react to the market. I prefer to follow fundamentals rather than “castles in the air” as Malkiel puts it in his book mentioned above. Speculation might seem promising and what’s “hot” right now. But remember, the underlying value of a company is truly what will sustain the growth over a long period of time.
To be even safer, as discussed above, I diversify. Essentially, don’t put all the eggs in one basket. By diversifying I minimize the risk of one single company bringing down my portfolio.
The concept of not getting rich overnight might seem hard for some, but it’s the truth; patience is the key. The way I started and how I’ve kept going allows me to sleep peacefully with confidence that in 30+years my original investments will be worth exponentially more.
As to me, I’ll continue with index funds and “blue chip stocks” — large, well-established with excellent reputation companies. While this is riskier than treasury bills, bonds, certificates of deposits and more, this is my risk tolerance and what I’m comfortably investing. Remember, it’s all about YOUR risk tolerance and not your friends’, your investment advisor or your dog’s. Invest what YOU can afford to lose.
There’s a lot of other important topics like dividends, capital gains, options, dollar cost average, ETFs, Real estate investing, etc. I’ll leave you with this article for now and catch you next time!
PS: If you liked this — share your thoughts in the comments and let me know what other investment concepts or stories would you like me to cover next time!
