Investing in a Nutshell
One thing I often hear from individuals is “investing is too hard”. “There are too many options.” “I don’t understand.” Or worse, “hey I just doubled my money in this investment!” I cringe. Too often I see individuals invested in the wrong products for their needs, or more often not invested at all. I have been investing for over 20 years, starting from the $5,000 my Mom gave me during the dot com bubble. (Please don’t ask me what happened to that money.) I have had some handsome returns, also made a lot of mistakes and learned a lot. I am attempting to sum up below how every day non-finance people can approach investing. I am not telling you what to invest in, but this is a framework on how you can think about it and the different aspects you need to consider.
Interest begets interest. When you start saving, or investing at a young age, watch the interest grow and compound. It’s truly marvelous to watch. If you save just $5 a day, save it or invest it, it will grow to some large quite unbelievable numbers in 18 years. Read more about it in this story. Conversely, if you are borrowing money, you will end up paying a lot in interest. The higher the interest rate, the more in interest you will pay.
Things always get more expensive. Inflation is another big one to consider. What $100 can buy you today, you will need a lot more than $100 to buy in 20 years. When you are planning for retirement or saving for college, add some to today’s prices because things will always get more expensive.
You get paid to take risks. Investment market is an efficient one. In order to make returns you need to take risks. Risk to put it simply, is how much your investment will go up and down, or volatility. The more you are willing to stomach your investment going up and down, the more likely you will make a higher return in the long run. But in the short term, you can see some big losses if you have to sell.
Timing is everything. Because of the above, if you need the money say in 3 months, tomorrow, put it in something safe, a bond, cash. If you don’t need the money for a long time, 20, 30, 40 years, you can afford to take more risks, put it in stocks or other more risky instruments.
Liquidity, liquidity, liquidity. How fast can I take the money out if I need cash? Stock market liquidity is almost instantaneous. If you need money from your stock portfolio, you can sell it today and get cash. If you are invested in a power plant project, you won’t be able to take your money out for a long time depending on the terms of the investment. If you need money from real estate, your house, you will have to clean it up, take pics, put it on the market, show it, get an offer, close on the deal. The quickest will be a few months.
Don’t put all your eggs in one basket. Diversify your investments. If one investment is doing really well, don’t put all your money in it. What can go up 20% a year, can also come down 50% a year. Put a little bit in each, in stocks, bonds, real estate, domestic, international, emerging market. That way when the market experiences a crash, hopefully all the instruments will behave differently and you will weather the downturn better with diversification. Talk to your financial advisor about what’s a good mix for you.
Plan for the unexpected. No one knows what happens tomorrow. You can lose your job. You can get hurt, therefore not able to work. You can die unexpectedly. As hard as it sounds, it happens, not very often. And you never know whether it’s going to be you. 9/11 happened. Covid happened. 2008 happened. Plan for those times. Good thing is they sell insurance for almost anything. Make sure you and your family are protected in the unexpected.
That’s it! These are the main things, from my $100,000 MBA and 20+ years of experience. I know I am oversimplifying, but almost every financial decision can be traced to one or all of these aspects. I also want to note this is based on my experience investing in the US. Other markets may have their own risks, like is the government going to take private assets. Any good financial advisor should be able to explain things to you in simple terms that anyone can understand. But when considering your financial future, these are the things to consider to come up with a good comprehensive strategy.
