The Complete Beginners’ Guide to Safer Investing
Would you prefer to be ugly now, knowing that as you get older that you will gradually become more beautiful? Or would you rather be beautiful now and worry about the future later on?
This little thought experiment is of course hypothetical. But if we apply the same question to our financial prosperity you will find that most people (especially when young) are probably only interested in the present day.
This is the reason why many new investors will try to invest in the get rich quick schemes and risky investments because they are just thinking about the now rather than later.
If you’re like me when I was young (which is no longer the case sadly!) the last thing you are thinking about is saving for your future.
There are more urgent things like holidays, nice clothes/shoes and cars to take care of! We want to be beautiful now and worry about the future when it arrives.
But with this short-term thinking comes risks. Most successful investors actually plan for the long term with 5 years being the minimum timeframe for investments rather than 5 minutes which can be the timeframe for impatient investors today.
In a similar way to fad diets or using performance enhancing substances in the gym you can get short term gains – if you are more patient, you would usually be better taking a long-term approach as the gains will be more gradual and regular.
I’ll show you how this short-term thinking and investment styles can be incredibly dangerous to your wealth and how long term thinking is a much better way to build your investments.
Best time to start investing
As in the Chinese proverb, it’s best to plant a seed as early as possible to get the maximum gains, the same is true for investing.
The best time to start investing is when you are young because the two key elements of investment success are:
1. When you start your investment journey – The earlier you start the better.
2. The length of time that you hold the investment – The longer you hold the investment the better.
Young people have both of these elements on their side and are at a great advantage when it comes to investing as long as you follow some simple rules.
Any investment is of course a gamble. Instead of having the security of guaranteed returns of a savings account, you will be taking a risk with your money.
There are however ways to maximise your chances of investment success as well as mitigate against issues that affect many new investors.
Please don’t be put off by thinking that successful investors are all privately educated, pinstriped wall street types. Investing is one profession where you can outperform the vast majority of experts with just a little knowledge and very little input from yourself.
Bear with me on this one – I know you’re probably thinking that can’t be right – but I’ll show you the numbers to back this up in Chapter 5 and in Chapter 2 I’ll show you how even a 5 year old girl managed to outperformed the experts!
I want to teach you how to use this long term way of investing to your advantage to invest more safely. But I also want to show you how and why to avoid certain other types of investing and advice that are less safe.
The method that you will learn to invest is well backed up by the numbers historically and is likely to continue to be profitable in the future.
However, I’ll start by showing you how you shouldn’t start your investment journey in Chapters 2-4. These are the most common mistakes that new investors make.
It’s important to know what to avoid so that you can block out the noise of investment schemes that you may read on social media and the internet in general.
I’d advise you to at leask skim over this section so that you can avoid the pitfalls. But if you want to jump straight to the best practices for investing you can skip those chapters and go straight to Chapter 5.
So let’s dive into our next chapter and that is looking at who you shouldn’t trust when making any investment decision.
Be Careful Who You Trust
Traditionally, the first place that you would tend to go before deciding where to invest your hard earned cash would be with a professional of the financial services industry.
Over the last few years however, there have also been a multitude of ‘experts’ on social media touting their get rich quick ‘investment’ schemes.
Just because someone is a ‘professional’ doesn’t necessarily mean that they are competent and trustworthy. The Oxford dictionary describes Professional as ‘doing something as a paid job rather than as a hobby’.
I’m sure we have all had various run-ins with professionals in other fields such as customer service where we were left less than satisfied!!
It’s why you should treat the word professional with scepticism. Of course I’m not saying that all professionals are bad, it’s just that you need to be aware that you can easily get bad advice.
I’ll go through some of the most common ways in which people get advice and appraise each one in turn.
You may turn to your bank first thinking that they have your best interests at heart but let’s have a quick look to see perhaps why you shouldn’t always trust the advice from your bank.
Does this list of mis-sold products sold by banks to their customers inspire you with confidence?
Banks have their own targets to meet so unfortunately they may not always give you unbiased advice.
I certainly saw my fair share of this when I was working at Barclay’s Bank where products such as credit cards were ‘suggested’ to vulnerable customers.
Remember, banks receive a commission for investment products that they sell.
I once went to the bank (which will remain nameless!) with my dad who was advised by a manager to invest a large sum of money in one of the bank’s funds.
This was back in 2007. After speaking to me, my dad decided against investing as he agreed with me that it felt a bit too sales-like.
Fast forward 12 months and the fund crashed by 50%, right in the middle of the 2008 financial crash! I’m happy that he listened to me and not the bank.
UK Banks are routinely fined or censured for mis-selling financial products. The list shows the fined just in the UK over a period spanning almost 20 years.
UK banks had to pay back an estimated 3 billion in mis-sold products back in 2003 whilst Morgan Stanley received a fine of 1.18 million for pushing its funds with the promise of Britney Spears tickets!
So, if we can’t trust the bank, maybe you would opt for a fund manager. Let’s take a look at fund managers and see if you should take your advice from them.
2. Fund Managers
Should you assume that fund managers are all competent? Or is a common misconception from the media and Hollywood?
In this (in)famous 2013 Bloomberg article it slated fund managers saying that the funds they managed were ‘for suckers’.
You can imagine how this article and accompanying image went down well(!) in the industry!
The article showed how hedge fund performance lagged the overall market (S+P 500) by around 10% that year.
In fact, the vast majority of US fund managers simply cannot beat their respective stock markets.
99% of actively managed US equity funds underperform their stock market according to the Financial Times.
These are scary numbers which may surprise you so why do the general public still use them? We assume that because they are well paid then they are automatically good at their job.
A UK experiment put a five year old girl Tia Roberts against an experts. Tia randomly choose shares whilst Mark Goodson, an independent analyst used expertise and computer analysis.
Overall, the little girl’s portfolio went up 5.8% whilst the expert’s declined a staggering 46.2%!
Not all fund managers are bad. The problem is finding the good ones. If you choose to go down this route, then you should ask a series of questions such as:
How long have they managed the fund?
What has been their record over the last 10 years?
Do they invest any of their own cash in the fund?
It may seem a little overwhelming but it’s essential research to carry out if you want to avoid incompetent fund managers with poorly performing expensive products.
In any case, an independent financial advisor may be a better option for you which we will look at now.
3. Independent Financial Advisors
Are Independent Financial Advisors worthy of consideration?
If you are going to take advice from professionals then Independent Financial Advisors (IFAs) are in the best position and are certainly worthy of consideration.
They are in a much better position than a tied adviser as they have access to a wide range of investment options. A good idea if you go down this route is to get a recommendation from someone who can personally vouch for the IFA.
Remember that IFA income is generated from commissions so you should always do your homework before parting with your cash!
4. Polished websites
Let’s take a look at a real example of a cloned firm that was operating into 2021.
Take a look at the two websites below. Can you tell which one is real and which one is fake?
Eagle-eyed readers might realise that Image 1 is the legitimate website and that Image 2 is the fake from looking at the website address.
However, if you were to land on the Image 1 page it’s likely you might not scrutinise the web address as thoroughly. Many would not even know which the genuine address was regardless.
But you can see how easy it is to be mistaken.
This is a genuine example of a cloned website of the popular brokerage Charles Schwab. The site was set up to scam investors out of their money.
The Financial Conduct Authority (FCA) of the UK highlights the even the most experienced investor could be at risk of scam firms.
In an FCA survey, 75% of investors said they felt confident they could spot a scam. However, 77% admitted they did not know what a ‘clone investment firm’ was.
This cloned Schwab site was still active in 2021. If you visit the Schwab homepage you will see there is still a warning about the fake site.
Users may have landed on the clone site from marketing emails, social media platforms or through cold calls. Some were brought here by submitting their interest in investments online.
This site as well as other clone sites make an exact copy of the real website, including the name and address of authorised firms and individuals, and a ‘firm registration number’ to suggest they are genuine.
They may just change the phone number so it gets routed to the fraudsters’ boiler room so the fraudsters can extract your cash from you.
If challenged about the phone number, fraudsters will just say that the regulator hasn’t updated their records. They have an answer for everything!
These clone firms are not limited to Schwab. Other well-known brokers who have recently been cloned include Trading212 (cloned as thetrading212.com), ETX Capital (cloned as capitaletx.com) and Vanguard Asset Management; Ltd (cloned as vg-assetmanagementuk.com).
In the UK alone in 2020, victims of these scams lost £45,000 on average according to Actionfraud with a total of more than £78m lost. It’s been suggested that people have been more prone to scam firms due to concerns over personal finances as a result of the pandemic.
How you can you protect yourself aganst common financial scams?
Unfortunately, the internet makes it incredibly easy for scammers to operate. However, there are a variety of steps that you can take to prevent you from becoming a victim of fraud.
Here are some methods to start with.
- To establish the authenticity of a website, always check the contact details from the site against your region’s regulator’s register (for example FCA of UK). Don’t trust the details the firm gives you.
- Be sceptical of adverts online and on social media promising high returns from investing online.
- Be on guard if you are contacted out of the blue, especially if you are pressured to invest quickly or promised inflated returns on investment.
- Research the product you are considering and the firm you are considering investing with. You can do this by searching your country’s regulator, for example the FCA of the UK.
- Seriously consider getting independent financial advice or guidance before investing.
- Don’t give access to your computer or device by downloading or installing software from a source you don’t trust. Scammers may be able to view, take control of your device and access your bank account.
This is not an exhaustive list but you will certainly be much better shape to make your investments if you follow the rules above. To learn more, the FCA has a great resource called Scamsmart which is certainly worth a look.
Remember, be careful who you trust! Which leads me on to why you should be wary of social media influencers.
4. Social media influencers
Would you trust this 20 year old with your investments?
New investors with less than three years’ experience were more than twice as likely to rely on social media sites for research or finding investment opportunities, according to the Financial Conduct Authority of the UK.
Many get their advice through hashtags such as #StockTok on TikTok and #investing on instagram.
Novice investors need to beware. Before the pandemic, Instagram scams in the UK alone averaged £60,000 a month, but this has now risen to about £200,000 a month.
Remember these figures are from Instagram in the UK alone. Not to mention other countries and social media platforms.
Unfortunately, as bad as the scammers are, the problem is also with influencers. Influencers are also cashing in at the detriment of their followers.
A recent 2021 BBC documentary followed the story of one influencer – Gurvin Singh whose advice ended up being financially catastrophic for his followers.
20 year old influencer Gurvin Singh using his Instagram accounts @GS_3 and @gs3trades (since deleted) managed to swindle many of his followers out of their cash before deleting his Instagram accounts.
In an elaborate PR move, he went around his hometown giving out free bank notes to people on the street.
This was covered by local news (Singh had phoned the journalist!) and this gave legitimacy to his ‘business’ which was essentially getting people to sign up for risky offshore ‘investments’.
Newcomers were told they could also be in claiming they could be like him and also drive a £100,000 gold Maserati if they followed his trades.
He persuaded his followers to sign up for a dodgy Forex broker based in the Bahamas called Infinox, receiving a tidy commission of up to US$1000 for each customer sign-up.
It’s likely this was the money he used to buy his Maserati and not his self-proclaimed successful Forex trading.
Everything was looking great for his followers until the markets rapidly turned. One trader, 24 year old Jonathan Reuben invested £17,000, saw it rise to £30,000 before eventually tanking to just £48 the day after Christmas Day.
1250 people lost £4 million to this scheme as seen in the image above. Singh got commissions from a forex platform called Infinox and claimed to make over £100,000 per month from the elaborate scheme.
This is just one example of the many £63m investment scams on social media in the UK alone. The number would be exponentially larger if we include other countries and non-reported scams into the equation.
However, Like fund managers, not all influencers are created equally.
On social media you can also find honest financial influencers such as Robert Ross over on @tik.stocks. Ross is a senior equity analyst for an investment research company and has been featured on Business Insider.
Ross educates younger people on how to build long-term investing habits. He said that he has had many screenshots from his followers losing tens of thousands of dollars who have followed the wrong advice or bad habits.
As a rule of thumb, if you see accounts offering wonderful schemes where you can double, triple or quadruple your money, these are likely scams or at least ticking time bombs and are best avoided.
If, however, the advice is more reasoned, suggests slower investing, and is written by an industry professional and not a random 20 year old student then it’s more likely that you can trust the source.
But of course, it’s often difficult to tell what is real and what is fake online and close examination of the accounts and the background of the influencer will be needed.
Often, Instagram advice is geared towards getting followers to sign up for day trading products such as Forex and CFDs which are forms of day trading.
The reason day trading is ‘recommended’ is because the sign-up commissions are so high – in fact up to US$1000 per customer acquisition.
There is a reason why the commissions are so high and that is because 75% of traders lose money day trading. In fact, you have better odds of winning in a casino playing roulette.
However, despite this, day trading is a very common entry route for new investors.
So let’s have a look to see why beginners shouldn’t start day trading.
The Dangers of Day Trading
Day trading products saw a 300% increase in signups from 2020-2021. Most of these were with products such as Forex and Contract for Difference (CFDs).
This huge increase was widely attributed to the pandemic where people with more time on their hands would look for ‘easy’ ways to make money from home.
Unfortunately, many new traders didn’t count on it being an easy way to lose money from home.
What is day trading?
Day trading is speculating on short term price movements of a financial instrument such as shares or currency prices.
It is usually carried out through what is known as Contract For Difference (CFDs) and its currency counterpart Forex through an exchange.
You never own the actual stock/currency itself. With these products you bet that the price will go up or down.
Much like if you were to gamble on a sports game, you wouldn’t own the team itself but you would profit on the result of your bet.
To show you how this works in finance let’s see a practical explanation through betting on the price of Tesla.
Let’s assume Tesla shares are priced at $700 and you believe that the price of the share will increase.
You then stake an amount (buy), let’s say $1 and if the share price increases to $710 then you have a profit of $10 but if the price drops to $690 then you will lose $10.
If you owned the share, that would mean paying the full cost of the shares ($700). However, with CFDs you might only have to put up 20% of the cost, in this case $140. Being able to speculate with a lower deposit is made possible through the use of leverage.
Leverage is simply the ability to speculate with less money on a market than you would normally be able to. Profits from the trade are then magnified.
Because of the lower initial investment, this can make this type of trading attractive to those with less to invest as psychologically it seems less of a risk and profits are maximised faster through the leverage.
But of course, losses are also maximised faster and unfortunately with day trading this losses are overwhelmingly the norm not the exception which we will now see.
Day Trading Client Success Rates
Do you think you would have a better chance of succeeding with day trading against going to a casino?
Considering the image above – our analysis shows that just 74.38% of investors lose money when Day trading.
If we compare this to roulette at the casino, the odds of losing on red or black are just 52.6%!
Some investment styles are inherently more risky than others. Products such as Contracts for Difference (CFDs) and Forex are notoriously risky with the Financial Conduct Authority of the UK estimating that the average loss amounts to £2,200 per client.
For these reasons, CFD trading is currently banned in the USA, Hong Kong, Belgium, India, and Brazil.
To make things worse, CFD and Forex brokers are often based in countries that also offer no funds protection and little consumer protection.
Even if they are headquartered in a country with strong consumer protections they can often ‘onboard’ you to one of their offshore jurisdictions. So let’s take a quick look at that now and show you how this is dangerous for your trading funds.
Day Trading Funds Safety
Most Day Trading brokers are regulated in several jurisdictions, each with varying levels of consumer protection. Our research suggests that over 90% of day trading regulators offer zero funds protection in case of broker failure.
Above is an example list of 7 popular regulators of day trading brokers. You can see that only UK regulation promises any form of funds protection for its clients in the case of broker bankruptcy.
So, if you were regulated with any of the other regulators and the broker was to fail, you would lose your deposit.
If, however, you were regulated by The FCA of The UK then you would be eligible for 100% of your remaining deposit up to £85,000 (Approximately €100,000).
Unfortunately, many new and experienced traders have no idea how well (if at all) their funds and consumer rights are protected.
What is important to realise is that even if a day trading broker has a good regulator such as the FCA, it’s likely they also offer other regulators too.
You can only trade with one of the regulators at a time. You don’t need to be a citizen of the country where you are regulated. So, you could be an Australian citizen (or other country) and still be regulated under FCA and still get the deposit protection offered.
Many day traders are unwittingly trading under an offshore regulator with zero funds and consumer protection.
It’s better to trade with funds protection as broker failure happens relatively frequently, particularly with day trading brokers.
A recent example of why it’s important to have funds protection is the recent collapse of AFX Markets which went into liquidation in 2019. Because their clients were regulated by the FCA, then clients were able to get their deposits back up to £85,000/€100,000.
If AFX customers were trading under alternative regulators such as British Virgin Islands (or other offshore regulation), then all client deposits would likely be lost as offshore regulators offer no funds protection.
Can I stay safe day trading?
Day trading is risky. These risks include (but are not limited to) market risk, client money risk, poor industry regulation and lack of deposit protection if the broker fails.
You also run the risk of incurring a negative balance.
It is possible to make money on day trading. However, if you do you are one of the lucky ones as we can see from the statistics that almost three quarters of traders lose money.
It’s incredibly risky compared with other forms of investing. Most successful day traders have a high level of experience which beginners do not have. Because of the risks, some regulators have stepped in to protect customers from themselves.
In March 2021 for example, Australia’s regulator ASIC felt obliged to change its rules on regulated firms to help protect customers from CFD trading. They reported that in 2018:
- Over 9.3 million CFD positions were terminated under margin close-out arrangements.
- 41,000 retail client CFD trading accounts fell into negative balance owing $33 million.
These are statistics from Australia alone!
Ultimately you are only safe day trading if you don’t place any trades at all.
As a rule, because of the inherent dangers of day trading I would suggest that unless you are experienced and proficient.
Usually, day traders are looking for short term gain and lack the patience to invest long term. However, as we have seen leverage this can quickly lead to fast losses.
It is likely that you would be better investing in something more long term such as in the stock market.
But before we cover stock market investing I want to show you the pros and cons of another popular way of investing for new investors and that is through investing in cryptocurrencies.
The Ups and Downs of Cryptocurrency
Cryptocurrencies are incredibly popular with new investors. However, they are incredibly volatile instruments and investors must tread wisely.
There is a lot of noise online about how you can massively profit from cryptos but as is human nature, we mainly just hear about the success stories as people are less likely to chronicle their failures.
Can you make money trading cryptocurrencies?
Sure you can! But you can just as quickly lose what you invest.
Because there are over 10,000 cryptos, we will just concentrate on the most famous which is of course Bitcoin.
Let’s have a look at some of the price swings that have affected bitcoin in a timespan of just 6 months.
You can see that the price of Bitcoin is incredibly volatile and there are huge gains to be found if you pick the right direction for the price of bitcoin. Just remember that the losses can be as large as the gains.
One of the crazy things about crypto prices is the power of a tweet. Elon Musk, the founder of Tesla has managed to massively move markets in both negative and positive directions.
Consider the chart below which shows just 3 of his tweets in just a one-week period and their effect on the price of bitcoin.
Musk possibly has more sway over crypto prices than anyone else with his 55 million twitter acolytes following his every move! So you will need to consider that when you are speculating on bitcoin.
If Elon Musk has a bad day and tweets something negative, it could end up being a bad day for many people including you!
What do the experts say?
Most financial planners suggest that if you want to invest in cryptocurrencies then you should only be investing between 1-5% of your assets.
It’s easy to get caught up in the hype and the fear of missing out (FOMO) but remember that it is far too easy to lose money with cryptos as we can see with the crazy price swings above.
So all in all you should just consider bitcoin and other cryptos a punt. Don’t bet more than you are willing to lose.
For sure you can make some incredible gains but you could also wake up and find that half of your cryptoassets are gone due to something as simple as a single tweet.
OK so we have seen the potential pros and cons of bitcoin as an investment but now let’s have a look at bitcoin and how you can keep it safe.
Cryptocurrency storage issues
Most people store their bitcoin and cryptocurrencies in an online wallet. However, you can also store it on your hard drive at home. But beware if you are storing your bitcoin at home in this way.
Back in 2013, a British man had 7,500 BTC stored on his hard drive which he threw away into the bin! As of May 2021 this would have been worth a mouthwatering US$300 million.
Storing your bitcoin in this way is also dangerous as your hard drive may also become corrupted, damaged, hacked or stolen. It’s not recommended to store cryptos in this way.
However, there are also many instances of people having bitcoin stolen from their online wallets. In April 2021 $633 million/£460m of bitcoin that was stolen from the Bitfinex cryptocurrency exchange back in 2016 has moved for the first time.
Additionally, it’s estimated that criminals have already stolen over $100 million from blockchain projects in the first half of 2021.
Below are some of the biggest bitcoin exchange thefts of all time:
Because Bitcoin and other cryptocurrencies are virtual decentralised currencies then there is nobody to turn to in cases where the bitcoin is stolen.
With Bitcoin and other types of cryptoassets, you are unlikely to have access Compensation Schemes run by regulators.
UK and European Union regulators state that most cryptoassets do not qualify as financial instruments under EU financial law so you would not have access to any compensation schemes for lost cryptocurrencies.
The same is true in the USA with neither of their deposit protection schemes (FDIC/SIPC) covering cryptocurrencies.
Most other world regulators also have no deposit protection schemes so if something happens to your bitcoin wallet you are essentially on your own.
How you can keep your cryptocurrency safe
Bitcoin storage can be made safer with adequate precautions. The first perhaps is that if you store your wallet on your hard drive not to throw it away!
Since September 2020, Lloyds of London are now underwriting insurance for cryptocurrencies via Coincover.
You can find a list of the Coincover firms here which all are covered up to $1m per wallet.
Some newer firms such as Binance (Founded 2017) have their own proprietary protection fund. Binance is an incredibly popular choice for consumers but it’s worth noting that they are coming under increasing scrutiny from global regulators.
The SEC of The USA issued a similar warning to US consumers in April 2021 about the platform for money laundering and tax offences. Japan’s Financial Services Agency (FSA) gave their 3rd warning in 2 years in June 2021 to Binance for trading in Japan without permission. In June 2021, The Financial Conduct Authority of the UK has ordered that Binance must stop all regulated activity in the UK.
Perhaps it’s better to choose a firm underwritten by a firm with a longer track record such as Lloyds of London (founded 1686) for your insurance rather than newcomers such as Binance who have a limited track record.
So is cryptocurrency a safe investment?
Unlike traditional stocks and commodities bitcoin has no intrinsic value.
There’s no guarantee it will continue to be worth anything. You can buy and the price could well rocket and you could make huge returns.
Of course the exact opposite could also happen with the valuation tanking and you making huge losses.
Recent analysis shows that if everyone who has taken a long term view on bitcoin investment and held for 4 years would all actually profit in the long run.
If you go in make sure that you have your eyes open with the understanding that you’re hoping to gain, but in the knowledge you could lose some or all of your money.
Whether that will happen or not, no one knows. Have a look at this image from June 2021 – both predictions from the same newspaper:
One article predicts that bitcoin will surge while the next article a day later from the same newspaper predicts that bitcoin will crash in a bear market!
The lesson here is that you need to beware when taking advice about the direction of the price of bitcoin and cryptocurrencies in general.
Recently, Andy Bell of the popular investment firm AJ Bell suggests that investing in cryptocurrencies ‘defies logic’ and that you should aim to ‘get rich slowly’.
He suggests that you are far better off investing in more stable and slower growing sectors such as the stock market has historically brought slower but more steady gains.
This brings us to the final chapter so let’s have a look at why the experts suggest that you are better investing directly in the stock market, especially for beginners.
Stock Market Investing
In the introduction I mentioned how it was possible for you to outperform the majority of fund managers.
There is an incredible story that shows that successful traders are made and not born. In a famous experiment in the US. Two successful traders Richard Dennis and his friend Bill Eckhardt had a discussion whether great traders were born or taught.
Dennis said that he could teach newcomers a set of simple, easy to follow rules. Eckhardt on the other hand suggested that genetics was the determining factor in good market speculation.
To settle the disagreement, they conducted an intellectual experiment – the most famous experiment in trading that was even the basis for a movie called ‘Trading Places’.
Enter The Turtles!
Dennis recruited people from several occupations including as accountant, a juggler, an actor, a security guard and a fantasy game designer! He called the group ‘The Turtles’ as he wanted to watch them grow like turtles in Singapore.
The experiment was an outstanding success, with an aggregate profit of $175 million after 5 years. Some of the turtles went on to start their own hedge funds and become some of the most successful hedge fund managers in the world. These include names such as Jerry Parker, Paul Rabar and Liz Cheval.
I’m using this example to illustrate that it is indeed possible for beginners like you to succeed in the world of investing. You just need to follow a time-proven method to succeed.
So let’s take a look at what the world’s most successful investor suggests that beginners should invest in.
Warren Buffet is perhaps the most well-known investor in the world with a net worth of $108.7 billion as of 2021. He is consistently listed in the top 10 richest people in the world which is an incredible feat in itself.
What makes it even more remarkable is that since 2006 he has given away company shares which would be worth an incredible $129 billion today.
Advice from Buffett should not be taken lightly!
Buffett is advising that beginners should buy into a pool of shares known as an index. If you were to invest in an S&P index fund you would get you a small portion of 500 of the largest publicly traded US companies.
Because you have a small part of each company you are automatically diversified and therefore your risk would be minimised.
What is great for beginners is that such a find requires no research into individual stocks, looking at balance sheets or market timing. The fund just tracks the performance of the stock index.
Buffet states that “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.
In fact, the vast majority of fund managers cannot beat their respective stock markets. 99% of actively managed US equity funds underperform their stock market according to the Financial Times. You can see below the performance of the S&P over the last 30 years.
The average annual return for the S&P 500 is close to 10% over the long term.
So if you had invested $10,000 in the S&P 500 index 30 years ago and reinvested the dividends received, you would have more than $210,000 at the end of 2020.
US and Non-US citizens can also invest in such a tracker although you may be more comfortable investing in a local index such as The FTSE of the UK. Over the last ten years the total return for the FTSE 100 with dividends reinvested, is a 7.38% annualised return. FTSE 100 total returns have averaged 7.75% per year since its inception in 1984.
Buffett’s advice may seem like incredibly simple advice, but it’s no accident that the world’s top investors operate KISS (Keep it Simple Stupid) strategies. Successful investing is about working smart and not working hard.
As in the gym, it’s better to be disciplined, keep form and focus otherwise we can injure ourselves.
The same is true for investing. Hard work may be the secret of success in some industries but in investing, the key factors affecting your success are not hard work but discipline and patience.
An added bonus is that if you invest directly with a US broker you will be covered by their deposit protection scheme provided by the Securities Investor Protection Corporation (SIPC) up to $500,000 (including $250,000 for claims for cash). UK based brokers will cover investments up to £85,000 whilst European brokers vary between €20,000 and €100,000.
With investing, there is no need you overanalyse and overcomplicate anything. Just follow what experts such as Buffett suggest.
There are countless guides on the internet and in the library that will confuse you with industry terms such as Fibonnacci levels, MACD, RSI, fundamental analysis, parabolic analysis etc. The list goes on and on!
Don’t overcomplicate things. If you have patience and discipline you can succeed with investing! That way you can slowly but surely work towards having a healthy financial future.
So we have seen: