I’ve been interested in investing since I finished high-school; who doesn’t want to earn heaps of money by doing nothing? This journey has had plenty of ups and downs (literally) from cryptocurrency to gold, but I feel like I have learned a lot (and lost a lot) over the past 4 years and wanted to share it so you don’t make the same mistakes I did.
Investing can be very nerve-wracking and something I know a lot of people in their 20’s often avoid thinking about because it’s too complex or risky, but I hope to show how easy it is, as well as how low risk it can be, when done the right way. Here are my learnings to date
1. Remove Risk
There are two ways you can reduce the risk of investing, a common barrier to entry into the market, especially for younger people. There are two ways to invest safely, no matter if you don’t know what to invest in, or what the stock markets conditions are (ie. going up or down). These are: invest in ETFs and Dollar Cost Average.
Invest in Exchange Traded Funds (ETFs)
Firstly, what are ETFs?
ETFs are somewhat like a group gift, a lot of people chip in a bit, so the person buying the gift/s has more money to play with and can get the person more gifts. ETFs are funds which a lot of people invest in, so they have a lot of money, which they then spread out across the stock market, so if one company goes up or down, it doesn’t make much of a difference to the overall value of the ETF. This is great because a huge worry for most investors is that they lose all their money through a company going bust, ETFs safeguard against this and unless the whole stock market crashes and society as we know it is upended, you’re money is pretty safe in the long term.
ETFs are an amazing way to get into the stock market because they are safe, following the general trend of the stock market. You can buy ETFs like any other share, all you need is a share trading account, which you can sign up to for free, pay a small fee to buy the share, and bingo, there you go, you’ve got a piece of the stock market.
Many of these ETFs also pay a dividend a few times a year, which I recommend you re-invest straight away, so each dividend you get slightly more than the last time, which increases exponentially so by the time you want to use the money (ie. retirement) it’s worth many multiples what you have initially invested. I’ll discuss compound interest later.
Dollar Cost Averaging (DCA)
So, you’ve saved up a chunk of money and you’re sick of it sitting in your bank account earning 0.2% interest and want to invest, DO NOT INVEST IT ALL AT ONCE. If you invest a lump sum of money into the stock market, you’re opening yourself up to the ups and downs of the market (ie. you could invest it and the next week the market has gone down 20%). DCA is a term used to describe what is simply investing a portion of the lump sum, regularly (ie. once a fortnight) until you have used it up. You pay slightly more in fee’s this way, but you safeguard against market volatility (which is very prevalent at the moment).
For example, let’s say you want to buy an ANZ share, which costs $20 today and you’ve got $2000 to invest. You could drop it all in at once and get 100 shares. If you DCA and invest $400, 5 times across 10 weeks, let’s say the market is quite volatile and the first one you buy at $20 (20 shares), then in 2 weeks time it’s worth $16 (25 shares), then $22 (18 shares), then $21 (19 shares), then finally its worth $18 at the end so you buy another 22 shares, you end up with 104 shares worth $1872, rather than 100 shares worth $1800 despite the same initial investment. This is only a small amount and small time frame, the effect gets magnified over the time period you do it. Brandon Van der Kolk from New Money on Youtube has a great video explaining how dollar cost averaging is better than buying even at the bottom of the price ‘dips.’ He explains it a lot better than me so I highly recommend watching it. He’s been one of the people who has taught me a lot about investing.
2. Be in it for the long run
On Average over the past 100 years, the stock market has gone up between 7-10% per year depending on who you listen to. This isn’t to say that the market went up 7% every year, some years it goes up 20%, some it goes down 10%, but on average, it goes up over time.
Here is a chart from vanguard (who’s ETFs I invest in) showing their returns over the past 20 years (until the end of 2019), and as you can see, it’s been bumpy, but over time, it has always risen. It’s on this premise that long-term investing is the lowest risk form of investing.
Here is an example of how not to invest, and why it’s so important to invest for the long term.
My first investments were in the end of 2017 into cryptocurrency, I was lucky enough to invest before the price of Bitcoin went through the roof. In 2 months time I had doubled my initial investment, which was absolutely incredible. I had no idea about the nuance of cryptocurrency, and rather than selling it there and then, I held onto it and the market crashed and I ended up selling my positions at a 12x loss. If I had held those investments, I would almost have not lost anything.
That was an expensive lesson, but a mistake I learned a lot from.
3. You cannot be an emotional investor.
When the cryptocurrency market dropped, and when the stock market crashed in March of this year (2020) I initially wasn’t phased, thinking, “nah it’s fine, it’ll come back up.” Then it kept dropping, and dropping, and dropping, before I got too nervous thinking the market would continue to go down, and sold my positions at a heavy loss. This year wasn’t as bad a the crypto saga, but I had still lost 30% of my initial investment. If I had kept my money in there and not touched it, I would be back to only 8% down. To make matters even worse I ended up buying back the shares which I had sold at a higher price. This is all the prime example of emotional investing, you get nervous and make irrational, bad decisions, which never end well. What I know now, and how I think of my investments these days is that it is money I’m not going to see until I’m 40 or 50. This means it can do whatever it wants until then, up or down, it doesn’t matter, because compound interest will be the greatest impact on increasing the value of the investments. On top of this, if you have invested safely, into an ETF then you will also make roughly 7-10% per year on top of the compounding from dividends.
4. The power of compound interest is ridiculous
There is the famous saying “Time in the market is better than timing the market” and all this means it the best time to invest is right now, because the longer you are in the market, the more time you are able to accrue through compound interest, no matter if the market is high or low. To show how ridiculous compound interest is, here is an example from a compound interest calculator, as you can see, if you initially invest $1000, then put $10 a week away and invest it (a la dollar cost averaging), at a 7% interest rate (ie. the growth of the shares), by the end of 10 years, you will have invested $6k and made nearly $3k in interest.
That’s pretty good, but wait until you see what the same investments turn into over 40 years.
With a $20,000 investment (accumulated over time), you end up earning nearly $100k earned in interest. Obviously, this is a very simplified version of how the stock market works but it’s a great illustration of the power of compound interest. As you can see, towards the end of those 40 years, that’s when the big money is made, which is why it’s crucial to start investing as early as possible.
Time in the market, is better than timing the market
You can play around with this compound interest calculator yourself here
5. How do I get started?
Getting started is really easy, the share trading platform I use is called IG, I’ve been really happy with it although there is a $50 quarterly fee if you have investments and don’t trade at least 3x/quarter. If you want to just buy something and hold it, this may not be the platform for you, but they have the lowest fees out of the one’s I found, $8 per trade.
Conclusion
Share trading can be full of volatility and risk, but I’ve explained some of the safest ways to begin investing. Invest in ETFs so you’re not reliant on just one company doing well. Dollar cost average when investing, this spreads your risk out reducing the risk of ‘investing at the wrong time.’ But even if you were to invest ‘in the wrong time’ it doesn’t matter because just the fact you’ve begun investing sets you up to the power of compound interest, which trumps everything and you inevitably make money, and exponentially more money the earlier you start investing.
I hope this has cleared the water up around investing, it can be very nerve-wracking and something I know a lot of people in their 20’s try to avoid thinking about because it’s too complex, but I have hopefully shown how easy and low risk it truly can be.
Harrison Hansford 