When should you start to invest? Should you start investing even if you don’t have money “lying around”?
Should I start investing? I don’t have money “lying
A reader recently remarked that my investing tips were all nice and good, if only she had extra money lying around. But she didn’t, so investing was out of the question.
Was it really?
What is really needed before you invest
Too many people think that investing in the financial markets is dangerous and stressful, and akin to gambling, without actually considering whether this is the case or not. Of course if that is how you see investing, the answer to “Should I start investing?” is “Definiltely not!!” And judging from the kind of questions I get all the time, I understand why they would think that way: very often, when people hear that I’m a financial markets specialist, they (half-jokingly, half-not) ask what stocks I can recommend at the moment.
This is the worst possible approach you can have to the financial markets. You simply don’t buy stocks blindly on a tip or recommendation from someone who doesn’t know you and your investing profile, just because they might think that a certain stock is poised to shoot up the charts.
Just the other day, I heard an all-too-familiar refrain: “I only bought such-and-such a stock because this person told me it was a good idea and that he had the inside track. Sure I knew more about investing than he did… which was absolutely nothing!” And that was only the latest occurrence. It happens all the time. Sigh.
You only buy stocks because (simplifying a lot) the company they represent is sound and a good investment, and because these stocks fit your own investment objectives.
Besides, even if you think the stock market is a gamble, you might already be an investor without knowing it. In many cases “Should I start investing?” is a moot point: if you contribute to a pension or insurance fund, well then your money is invested in the financial markets. You are already an investor. Insurance and pension providers don’t just take your money and leave it “lying around” until you need it. If that was the case the money you would receive after ten or twenty or thirty years would only be a shadow of what is used to be worth, because of inflation. To avoid this, insurance and pension funds invest in the markets with a view to growing your money until you need it.
You have more money lying around than you think
You might not think of the sums you regularly pay into an insurance or pension fund as “extra money lying around” because, in your mind, it serves the specific purpose of protecting you, against accidents, illnesses and old age.
And that’s what investing is: it’s not gambling. It’s called investing for a reason. Yes, it comes with certain risks. But you can invest very conservatively and still make a return.
To start investing, it’s not “money lying around” that you need, but money earmarked for that purpose. After all, how have you been making regular private pension and insurance payments all this time? By budgeting and spending less on other things.
And why were you able to put money aside for insurance and a pension fund? Because taking care of your future self is important to you, so you made sure you had the money for this. Investing is no different. And you don’t need to win the lottery to start investing: how about starting with €1000 and adding €50 a month to begin with? Yes, that’s all you need to start investing in the financial markets.
Perhaps you think insurance and a pension fund have you all covered. But what other big-ticket items would you like to afford? For example investing properly is a good way to prepare for the time when your children want to go to university: you might start investing in the stock market when they’re born, so that by the time they’re 17, you have a nice lump sum that will cover tuition fees, accommodation and living expenses, so that your children are not burdened with student loans.
The answer to “Should I start investing?” will also depend on whether you have financial goals such as these.
Remember that you absolutely, absolutely need to have precisely quantified goals before you start investing: how much money do you need, by when?
You also need to surmount the psychological
barriers to investing
Yes, you can start with as little as €1000, and you need to be in this for the long term. But then what do you do?
Too many people have very little idea of the products that are available in the stock and bond markets. For example many people have this misconception that you have to listen to the recommendations of a very expensive broker and then use their services to buy and sell stocks. You could do that, but you could also simply learn how to use an online broker for a fraction of the cost. In fact, I recorded a free, in-depth e-learning module to help you learn how to trade online.
But then you say, you have no choice but to pick your own stocks – and you have no idea which stocks to pick! You can certainly select stocks yourself, and there are many valuable resources that will help you do so in a risk-controlled way (Gillenmarkets provides education about stock market investing).
But you could also simply invest in an index-tracking ETF for example. ETF stands for Exchange Traded Fund, and an index-tracking ETF is an ETF that replicates an index.
The stock market without tears: how to get started
in the stock market
If you’re a complete investment beginner, that last sentence was a lot of jargon, so let’s break it down.
An “index” is a list comprised of the stocks of the most representative companies on a given stock exchange. It is used to give an approximation of how the stock market is doing. If you’ve listened to the news even only once in your life, you must have heard that the S&P 500 or the FT100 or the Nikkei are up or down a certain number of percentage points.
These are all indexes: the S&P 500 is a list of the biggest 500 companies listed in the US, including the 30 biggest stocks. The FT100 is a list of the biggest 100 companies on the London Stock Exchange, and the Nikkei is the Tokyo Stock Exchange index. There is a myriad of indexes, some of which are industry-specific, like NASDAQ for tech companies.
An ETF is a fund, that is, a collection of stocks. When you invest in a fund, you don’t have to worry about selecting the “right” stocks: those stocks have been preselected for you. It’s like buying a “selection” box of chocolates, instead of buying each separate sort of chocolate bonbons separately.
You’re likely to be familiar with buying a fund through your insurance provider or your private pension scheme. An exchange-traded fund can be bought, not through your insurance or private pension provider, but directly on an exchange.
And finally, an index-tracking ETF is an ETF that invests in a collection of index stocks: those stocks that are part of the S&P 500, or FT100, etc.
Why is such an ETF a good thing? The stocks that constitute an index belong to well-established companies. These companies have been around for a long time, they have high “market capitalisation” (they are worth a lot of money and have a lot of stocks to represent that amount of money), and their stocks are “liquid”: they are easy to buy and sell because there are lots of buyers and sellers interested in trading them.
As a result index-tracking ETFs can be good for beginning investors because they take all the guesswork out of selecting stocks. The three biggest ETF managers are BlackRock iShares, State Street Global Advisors and Vanguard.
Please note, of course, that this is an example to show you that investing in the stock market isn’t as arcane as you think. Please ensure that ETFs suit your needs before investing in them!
More often than not, the true question behind “Should I start to invest?” is “Is investing doable without losing my shirt?” The answer to that is yes, BUT! Should you start to seriously educate yourself about the financial markets? Most emphatically, yes!
Are you on the list?