Dear #InvestmentFrenzied, potential investor, you cannot cheat time. The investment you make today will barely get you rich tomorrow. I am terribly sorry if I may have deflated your bubble, but the unadulterated truth is that you won't truly see the spoils of your investment until you almost forget about it. In any case, congratulations! Investing your money wisely can catapult you to wealth creation over time.
Just in case you decide not to read any further, may I invest some financial education before you become further disheartened? If, however, you decide to read this article in its entirety, I promise you that you would have made the best investment ever in your life, education. To go from novice to expert in investment strategies requires transcending the curse of ignorance. Winning at this investment game and transitioning from good-to-great must be built on a solid knowledge engine, which must be supported by:
What is an investment?
An investment is not saving. Although used interchangeably, there is a difference. Whilst saving is simply stashing money for emergencies or future use, investing is buying assets such as stocks, bonds, mutual funds, or real estate with the expectation of making money.
Warren Buffett is undoubtedly the ultimate investment maestro. This “Oracle of Omaha”, the most successful investor of all-time net worth in 2020 is 73.4 billion USD. He could, in July 2020, buy an additional 33.9 million shares ($813.3 million) in banking giant Bank of America (BOA). This one purchase increased his stake through Berkshire Hathaway to more than $24 billion. Now, this is what you call investment. Bank of America is a dividend aristocrat, with a dividend yield of 2.91% and dividend per share increasing from $.075 to $.18 per share in 2019. Not only is Warren earning from dividends, his worth changes over time, based on the movements in the stock price, which as at year to date (June 30, 2020), the 52-wk high was $35.72 and low $17.95 per share.
We may sit and marvel at his investment genius, but as he asserts in a conversation with Jeff Bezos, not many have bought into his simple investing strategy as nobody-wants-to-get-rich-slow. So, from this investment wizard, we should learn that building wealth takes time. Do we have the time even? Can you imagine sitting in the shade at some point in your life because you had planted some trees a long time ago?
Here is a reference to some good information on warren-buffett's-tips-on-how-to-invest-in-the-stock-market.
That Big Bank Balance – what a disguise!
The lesson here is that your traditional bank account will not work if you desire to become wealthy from earnings on your money because this account does not have the charisma of investments. It hardly rewards you with a return if any at all.
What type of investor are you?
Which type of investing makes you the most money?
Are you willing to take the risks and incur high fees with active investing, or do you prefer to limit your investment by employing a buy-and-hold strategy, thus missing out on those potential benefits from price fluctuations?
This depends on your interest, time, budget, and risk tolerance. You do not have to be an outright active or passive investor, but you can be a blend of both. In an article written by Pam Kreuger, she posits that Dan Johnson, a fee-only advisor, believes that blending both can help an investor to diversify his/her portfolio and help in managing overall risk. Each has its pros and cons, but then again, the choice rests solely with you, the investor.
Investing for the long haul – buy-and-hold mentality.
Requires a hands-on approach (need a portfolio manager).
Limit the buying and selling of stocks, a cost-effective way to invest.
Requires deep analysis and expertise to know when to take advantage of price fluctuations.
More tax-efficient -due to the buy and hold strategy and its dodging of capital gains tax in some jurisdiction.
Very flexible since these funds are not tied to any specific index. They can buy and sell depending on the market movements.
Limited to a specific index or predetermined set of investments. Investors are locked in no matter the market movements.
Allows for hedging techniques such as short sales or put options. Can exit sectors and empty their portfolio of stocks when they become too risky.
Returns are small as the core holdings are locked in to track the market.
Expensive due to the active buying and selling and the associated transaction costs.
Very risky because the fund manager can buy an investment that he thinks would bring a high return, but what if he is wrong?
Can you afford to invest?
To help you answer this simple question, let us assume that you intend to buy 1,000 shares of one of the stocks listed in the table below. The total cash outlay you require today is shown in the investment column. The dividend that you would have received had you invested in Apple, Walmart, and Bank of America is shown in the dividend payout column.
The truth is, not many of us can afford to invest at all. If you were to ask yourself how much can I afford to lose today, or how much can I do without today for the next five years, what will your honest answer be? Then again, do you even have any savings today to invest?
You do not have to invest in stocks and bonds, but you can, however, start small and early by putting away money in an investment vehicle on a monthly or annual basis where the rate of return is higher than the rate of inflation.
Remember that the real interest rate is the quoted rate minus the rate of inflation. (Real Rate of Interest = Quoted rate - the rate of Inflation).
The art and science of investing revolves around time, sum, interest rate, risk, compounding, knowledge, and a culture of discipline. More precisely, this means:
Again, do you have money to put away today?
Do you have money in such a handsome sum that you can earn big from it if you were to invest it?
Note that in the list, I used the word "may" because an investment is a risk and the actual may differ from the expected return because of the uncertainties inherent, a characteristic in investments that you must never ignore.
When to start investing?
As was posited earlier, wealth creation, well honest wealth creation is a timely process, so we can all agree that it is best to start early. The biggest advantage you can give yourself is more time and knowledge, coupled with the power of compound interest.
Also, important to consider are your short and long-terms goals, age, and current financial position. With these as a precursor, you may want to consider:
Here is how much you may have at retirement if you start saving at 20, 30, and 40 years of age. Note that the earlier you start investing, the more financially sound you will be at retirement.
Now that you have seen the mathematics and the compounding effect of investments, you can achieve your retirement goal. You must, however, make sure that you have a plan and remain committed to the financial architecture that you have designed. Mind you, this architecture does not excuse you from adjusting, so if the need arises, please feel free to adjust the plan accordingly. In that, you may need to increase your monthly savings and or buy into other investment vehicles.
What to invest in?
There are many investment vehicles. Some common ones include:
Investing in a company's future success and failures
Large companies and governments borrow money from the public by way of bonds
An investment vehicle whereby a market index (S&P, Nasdaq Composite, Dow Jones Industrial Average) is used to balance your portfolio
ETFs (Exchange-traded funds)
These are like stocks, in that they are traded (a basket of securities - stocks, bonds that you can buy and sell through a broker)
A pool of investments (stocks, bonds, and other investments) created and managed by a fund manager, which are held in trust on behalf of individual investors
Real Estate (Individual/Real Estate Investment Trusts-REITS)
Residential, commercial, and land. Buying and selling or rental income. Ditch your rent and become a property owner as your initial investment
What you decide to invest in depends on your risk tolerance, your budget, and your investment style.
Types of Stocks
There are two major classes of stocks that you should be aware of, both of which can be found on the major exchanges.
Common and Preferred Stocks
A common stockholder is a partial owner of the company with the right to receive a proportional share of the residual value of any remaining assets if the company is dissolved. These investors, (provided their shares have voting rights), usually have the right to vote and to approve major corporate decisions. One thing that I should point out here is that as a partial owner, there is no right to a dividend. A dividend is earned only if and after the board of directors declares one after assessing the needs of the company. So, the fact that the company is extremely profitable does not guarantee a dividend. A case in point is that of Amazon. The upside to this is that when the company does well, the stockholder benefits, and the opposite also holds.
On the other hand, a preferred stockholder enjoys preferential treatment to common stockholders if the company dissolves. This shareholder is not a part-owner of the company but enjoys the right to receive a dividend, which is fixed at a certain rate, before the common stockholders. This type of investment resembles a bond where a fixed rate of return is promised, but it is still not as secure as a bond.
Common stocks are mostly issued by companies as investors often seek to purchase these types of stock.
When and where to buy stocks?
Stocks are traded on the primary and secondary markets. The market in which you participate depends on whether the stocks are being issued for the first time or are being traded among investors.
Primary and Secondary Markets
In the primary market, companies sell stocks and bonds for the first time, such as with an initial public offering (IPO). The important thing to note here is that the security is purchased directly from the issuer.
In the secondary market, investors trade securities among themselves. These securities are the same securities that were issued through an IPO. At this point, the original issuer is not involved in the process. This is what we know as the stock market and includes markets such as the New York Stock Exchange, the London Stock Exchange, Nasdaq, and other exchanges worldwide.
Stocks that are issued for the first time usually provide a better opportunity for first time investors as the stocks are usually more affordable than if they were traded on the secondary market among investors at current market rates.
There are many online trading platforms such as WealthSimple, and TD+Ameritrade, along with many others, where an investor can invest and trade stocks, or he can seek the services of a financial advisor or a stockbroker. In any case, this does not absolve you, the investor, of your responsibility to do your research as your knowledge plays an especially important part in the art and science of investing.
The foundation is now laid, you have gained valuable information, and you are now more informed. The global marketplace is, however, quite dynamic, and you must constantly keep abreast of the changes so that you can take advantage of the opportunities and cauterize the possible negative impacts on your investment portfolio. If you are already a seasoned investor, research what MORE you can do to diversify and improve the risk-adjusted returns on your investment portfolio. If you are a first-timer, you are heading down the responsible path towards wealth creation and control of your financial future.