Investing For Dummies 2023 Edition
Welcome to Investing For Dummies, the first InvestinGoal free course, dedicated to the basics for learning how to invest today.
We live in the “information” era.
Nowadays more than ever, knowledge and even advanced concepts are accessible to everyone very easily. It didn’t take too long that even a as complex and variegated universe as investing benefited from this advantages.
The knowledge to be able to discover this field and to start your investments for dummies is now available to everyone, as you will discover in this first Investing For Dummies course and the others to come.
Investing for Dummies – Technologies and evolutions
Evolution and the new form of technologies have created the conditions for new modern form of investment, always more accessible and fast, one among all being Social Trading.
But, the fact that today everything is more accessible and easy to use, should not let us believe that also having success with investing is easy and risk-free. Despite evolution, for a beginner the chances of success or failure have remained more or less the same.
What has changed is the possibility that a beginner has to access more easily to the resources needed to invest today.
The Investing For Dummis course and the other InvestinGoal Courses, together with our Social Trading blog, are the places where you can find everything you need in a well-organized and sequential path. You can start even if these topics are totally unknown to you. Step by step you will learn everything.
How to invest for Dummies
To start investing today is easy, but doing it in the right way requires the right knowledge (sometimes even technical). You may also try it all alone, and go for a long road of trials and errors.
Or you can start with Investingoal and his first course Investing For Dummies.
Here is where the journey begins, a journey that will get you, in the shortest time possible, to become an evolved investor.
Then, you will discover the most accessible market, the Forex, where you can invest even with a small amount of savings.
You will then learn how Social Trading works. It’s an innovative form of investment based on Forex, which will allow you to invest today without necessarily becoming an expert in this market.
There’s a better, modern and evolved way for investing today, and the path that will lead to discover and really understand it starts right here.
Let’s start with the first chapter of Investing For Dummies.
What does “investing” really means?
What’s the initial capital to start investing
“To invest a capital”:
– To commit capital in order to gain a financial return;
– To put capital to use, by purchase or expenditure, in something offering potential profitable returns;
We don’t know you, but for us the journey towards the discovery of the investing art began pretty much in the same way: we were kids, and we all three watched the legendary film “Wall Street” by Oliver Stone in 1987.
It was undoubtedly at that time that the world of finance, markets and stock market began to exert its fascination on us. It was also at that time, however, that a false belief took root in our way of thinking about the possibilities of investing.
As you can see from the definitions taken from various vocabularies, for investing we are talking about using “capitals”, and this term has always had a meaning of magnitude and importance. How much is a capital? How much is it worth?
How much is worth a capital to invest?
It’s a common thought that the term capital is synonymous with “large amount of money”.
It’s a relative and personal amount for each one of us, but almost always in our head takes the form of a value that will be very difficult to obtain and use for any investment purpose.
“I’ll never have a capital to invest,” “Only the rich have the capitals to invest.”
Well, the first step is just to get rid of this false belief.
It is a crucial step, perhaps the most important. The term “capital” must lose any meaning of greatness or importance. It must become much more simply, “the amount of money available that, if lost completely, it would cause no problem at all”.
This is the capital to be invested.
We don’t mean that the money to invest should not be considered important. On the contrary! You’ll have to deal with the money you’ll invest with the utmost respect, giving it the utmost importance. You just have to stop thinking that to invest are required large capitals you think you won’t ever have. The reality is that everyone has a capital. All, without exception.
For somebody it will be hundreds of thousands of dollars, for others tens of thousands, for others maybe only a few hundred dollars. It doesn’t matter.
Whatever the figure is, that is a capital that can be used for an investment. With this first course, and those to come on Forex and in particular on Social Trading, you will discover that it’s really possible to invest in a few steps, and especially how this today, thanks to computer support, is really affordable to everyone.
You just have to continue along this journey and take with you the information you will find in InvestinGoal. Give yourself this opportunity. Once finished this and the other simple courses, you will have the instruments to start investing and build on your personal capital, whatever it might be.
Investing money: the two main roads you can use
The explanations of what “investing money” means can be many, more or less technical, more or less detailed. But the definition we like the most is only one.
To invest means let your money work for you, in your place.
Beyond philosophy and clichés, we all know money is an essential part of every man’s or woman’s life. We need money and money is at the basis of a myriad of key activities that pertain our life.
The first big distinction we have to do is between “having money” and “using money“. Putting our money, as someone says, under the mattress, will turn us into money possessors. But being possessed is not the purpose for which money exists. Money is there to be utilized.
You can use it to do your shopping, to buy goods, the smart phone, the automobile and in general everything that passes through your head. Also having a small untouchable amount for the dark times is not a bad idea. On the other side, you can use your money to make other money. And this is precisely what is meant for “investing”.
One of the main benefit of investing money is that moneys works on its own, independently, there’s no need for your sweat or your continue initiative. Of course, this doesn’t mean you should forget about it and don’t ever think or control it.
You’ll have to tell your money where it should stay and how it should behave, and to do that you’ll have to be aware of certain technical factors, and in general the more things you’ll know the better. Then, money will do the rest.
The two ways for investing money
We can basically distinguish 2 major investment categories.
The first: to buy a good, and then wait for this to raise in value over time, so to be able to resell at a higher value and cash the profit.
This is the method that probably everyone knows. The most well known in this context is the purchase of a property. We all have heard or maybe even said “I asked for a home loan, it’s an investment for the future”. A person buys a property in the hope of reselling it in the future when prices, it’s assumed, will be increased.
Another example of this type of investment is the purchase of works of art. In this case, rather than hoping for a value increase based on time, the investor hopes for an increase of the quotation and popularity of that specific artist or type of work.
Finally, one of the most important examples of this type of investment is for sure the purchase of company’s shares. By purchasing a share, the investor becomes owner of a piece of that company, and he hopes the value of that company will rise, so he can then sell that piece of the company to a new owner, or another shareholders, at a higher value, and cash the profit.
This is the branch we are interested the most, and it’s definitely one that has grown and diversified the most over all in the past few decades.
Now we can even buy a financial instrument and earn money if its value decreases. It might seems crazy, but actually is not. We will discuss this concepts in the next course dedicated to the Forex market.
The second: to lend money for a certain period of time and then get them back with the addiction of an interest.
Let’s think about the famous American bond, or German bund, or Italian bot, of which we have heard so much in the last years. By buying a bond I am lending my money to that country for an amount equivalent to the value of that bond at that time, and the country is committed to give the money back to me on a specific date, with the addition of a pre-determined interest, with no possibilities of escaping from this payment, penalty the declaration of bankruptcy.
There are many types of bond, not only for country, but also for companies. By buying that bonds, you lend money to the company that issued them. The company will reward us after a certain period paying us an interest in the form of coupons.
Ok, now you know the two major ways in which you can invest your money and make sure that it’s your own money to bring some more money in your pocket. There are a lot of possibilities, all different and each with its own strengths and weaknesses.
With these InvestinGoal courses you have the chance to discover the fundamentals of the art of investing, and then specialize in the most innovative, called Social Trading.
The choice will be up to you.
A very important difference
The important thing, after realizing what an investment is and how you can invest your money, is definitely to understand and have clear what an investment IS NOT.
Investing is not gambling. I don’t choose a company the same way I choose a number of the casino roulette. A lot of people still make this associations. It’s true that investing means to bet, but a bet is not based on luck alone. You can also bet on the stock market pulling a dime, but do it in a professional manner is another thing.
The art of the investing money is based on reasonable expectations, which derive from statistics, derived in their turn from professional studies done on that sector. An investment is based on these components: study, experience and facts.
Obviously, risk still exists, and it’s part of the game. It does not and will never exist the absolute certainty of a profit for each investment transaction you’ll make on the market. There are statistics data and there are systems that work via them and that can produce a gain in the best way possible.
As investor you have to learn to recognize and foster those investment systems that statistically, in the long run, are profitable.
But above all, you will always have to deal with risk.
First of all you needs to accept it, because it exist and it will be your ubiquitous travel companion.
Second, you must learn to distinguish it, because when you will understand how to handle it, that will be the moment in which you will pass from “gambler” to “real investor”.
Major types of financial investment instruments
You’re probably wondering what are the main investment methods for a common person with a modest (or very limited) budget, and if there’s something simple to start with, maybe in a short time.
The financial world is constantly changing, and together with the classical and so to say historical methods, there are now new innovative ones.
It’s important to know all of them because one of the first rule of a good investment is to diversify risk by investing in different types of assets, what in technical jargon is knows ad diversifing the investment portfolio.
In this lesson of the course we will explain in very simple terms the main financial investment methods of today and their main features, including also the one with which you may start with very little capital and in a very short time.
Classic investment instruments
From Investopedia: “A share is a unit of ownership interest in a corporation or financial asset”.
Owning one or more shares of a company literally means to be a member of that organization, then to have the right to vote, but, above all, the right to earn from the profit produced by that company, usually in proportion to the number of shares held.
So, if you own the 1% of a company’s shares, when and if it will decide to distribute the so-called dividends, you will cash out the 1%.
However, the peculiarities might be many, and not all companies pay the dividends to its shareholders. In that case, the shareholder will be able to make money from his investment gaining from the growth in value of its shares, and the subsequent sale to another investor.
A company’s shares are subject to the fundamental market laws of supply and demand, so, in general, the more a society is strong, the more its shares will be required and therefore the more their value will go up. Conversely, the more a company is weak, the more its shares will be unattractive, people will not want them and they will lose value.
This means that if shares pays no dividends, you can only gain from the fact that they increase in value, which in other words means to speculate on the difference between the sale and the purchase price.
The percentages of return on the investment can be very high, but on the other hand, there are also many risks that the share’s value simply doesn’t rise up in value, or even that it goes down.
From Investopedia “A bond is a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.“
Having a bond means having lent money to another company, and having in your hand a title that certifies that the company has a debt towards you, which must be compensated on a specific date, together with the payment of pre-determined interest, to honor your loan.
Usually the more risky the company to which you have lent money is, the higher the interest will be. Conversely, if the company is considered less risky your investment will be paid at a lower interest rate. Or, if the company knows to be less attractive than others, to attract customers it can put into circulation bonds that pay a higher interest.
The most famous bonds are the governments bonds, like the USA Bond, the German Bund, or the Italian Bot.
The fact that they are called bonds (obligation) is to indicate that those who receive the money borrowed are obliged to repay the capital, plus the interest on the indicated date. So, we have a fixed date and a fixed return.
From one point of view we can say that bonds are risk-free investment, although they are not. The companies can still fail and therefore no longer fulfill their debts, and never as in recent years we have had firsthand experience of the fact that states themselves may go bankrupt (see Argentina).
Aside from the risk of failure, which, however, considering states, remains small, the relative safety of this instrument obviously has a price, and it’s the fact that bonds produce very small percentage of return, sometimes really tiny.
Shares on the other hand can offer much higher yields, but there is obviously a risk that these returns do not come at all.
– MUTUAL FUND
From Investopedia “A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors“.
In other words, when you invest in a fund you become part of a group of people who have collected together their money, which it’s then delivered to a expert investor to handle it.
The manager then go with that capital to buy stocks and bonds and build up the mutual fund. The profits are then distributed in relation to the shareholding stake in that fund.
There are hundreds types of funds. Funds that invest in baskets of securities, funds that tend to replicate an index or set of indices, funds managed passively or actively, including the well-known hedge funds. The distinctions that can be done are many.
Usually many of these investment funds are hooked on savings plans or insurance policies, and are used by users who are not willing to spend time learning how to invest independently.
The benefits are many in that sense, as well as the disadvantages. The main disadvantages are that the returns on the investment are often very poor, affected in many cases by the high operating costs. The operator must be paid in any case, even if he fails to produce any profits, and the risk of a “creative” management, which aims at generating commissions rather than generating profits are just around the corner.
In many respects, these tools are used by those who have large investment capacity and uses them to keep their capital away from inflation and gain something if things go well.
In simple terms, inflation means the rising of prices of goods and services, resulting in a reduced purchasing power. If today, with your funds, you can buy a certain number of goods and services, it doesn’t mean that in a few years, with the same money, you can buy the same amount, because the price of those goods and services will be increased, due to inflation. It’s also called a decrease in purchasing power.
Those who invest in these types of instruments usually look first and foremost at preserving the purchasing power of their capital, and then, if it’s possible, to earn something.
Speculative investment instruments
The first 3 investment categories include, in a sense, the actual purchase of an asset, whether it’s a stock, a fund stake or a share, to be kept and preserved, waiting for them to generate returns through appreciation or dividends.
The tools that we will see now do not involve the actual purchase of the good, and it’s not necessarily assumed that the good has to appreciate to generate a profit. Here we enter in the speculation and short selling territory, where you can earn even after the depreciation of a particular asset.
Usually the world refers to these tools as “derivatives“, because their price derives from the market value of another financial instrument, defined underlying (such as, for example, equities, financial indices, currencies, interest rates).
Despite many times we hear certain terms such as “speculation” or “short selling”, and most of the times not with positive connotations, I invite you to investigate the issue, to understand how the tool itself is not the problem, but only to use that just a few individuals make.
From Investopedia “An option contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).
In other words, with an option agreement I have the right (not the obligation) to buy or sell an asset at a specified price and / or within a certain date, paying immediately a small fee to get this right.
In case there will be favorable conditions, I will confirm the purchase or sale option as written, making my investment bear its fruit; if instead the conditions will be unfavorable, I will not conclude the transaction, and I will avoid the loss, but I will of course NOT recover the initial cost already paid.
Within this basic operations there are a long series of advanced strategy, such as the opportunity of selling these contracts instead of buying them, but this is not the place to talk of this topics.
From Investopedia “A future is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.”
In practice, with futures you get the right to buy or sell goods at a price and date that have been established at the moment of creation of the contract.
Upon expiration of the futures contract, the investor will benefit and gain from the difference between the purchase or sale price established with the future, and the current market price of the underlying asset of the future itself.
Obviously, if this difference is positive, there will be a gain, conversely a loss.
The future underlying assets can be both real, such as commodities (wheat, gold, metals, coffee, etc) as well as financial. In the latter case, we will talk about “financial future”, whose underlying assets can be, for example, a currency (currency futures) or a stock market index.
The Foreing Exchange Market, commonly called Forex or Fx, is the currency market, the largest market in the world and the most well known in our times. Forex is not an investment, but a market where instruments such as options or futures, in addition to the mere purchase and sale (the spot market), can be used.
In this market participant don’t exchange goods, but only currency pairs. In fact, a currency is never bought or sold individually, but is traded on the basis of the equivalent with another currency through an exchange. Speculators invest on the fact that this exchange between the two currencies will grow or diminish.
Options, Futures and the Forex market offers huge earning potential, but obviously, given the law of compensation, the risks grow hand in hand. In addition to this, the level of knowledge and experience necessary to be able to invest profitably in these areas is very considerable (check out our list of the best forex trading sites for beginners).
Compared to rely on others to buy stocks, or bonds, or mutual fund shares (which does not require time to be learnt), to act personally in these areas for sure takes years of deep and intense studies.
Any promise of being profitable with little or no effort should at least keeps your ears peeled, because statistics show that around 90% of those who try these difficult instrument by their own, without the necessary studies, miserably fail.
– SOCIAL TRADING
Social Trading is the newcomer in the panorama of the financial investment instruments and it’s an instrument derived from forex autotrading.
Its key feature is the fact that it stays halfway between the two main categories seen so far:
- on one hand the simple acquisition of shares, bonds or fund and the passive waiting for revenues
- on the other hand the retail speculation, with a higher risk index, on the forex or stock market, with futures and options or spot.
In Social Trading the investor is the direct manager of his money, he doesn’t rely on any external manager, but at the same time he does not have to buy or sell personally. Thanks to specialized platforms, the investor can view a portfolio of market operators, called traders (or Signal Providers), he can observe and compare their styles and performances, and, if interested, he can choose to connect his account to one or more of these traders.
Once connected, all the operations made by the trader on his own account, will be replicated automatically on the investor’s account via the Social Trading platform. So, it’s not the investor deciding what kind of operations to do, but it will be the trader he had chosen in the initial phase.
Once the favorite traders have been chosen, the investor can leave his money to work and periodically perform control operations on his investment.
Earnings, compared to the amount of capital used, can be definitely higher than those of bonds and even stocks, and also the timing might be shorter. On the other hand, there is still risk, but with the proper knowledge it will certainly be much lower than the retail Forex speculation, since the investor relies on traders who have already proven to be profitable.
We will see in detail the potential of this new form of investment in the dedicated course. But for now, do not rush, and first terminates this course, because here you will find the most important concepts for the success in any investment, including, of course, with Social Trading.
The Time Factor in an investment
When we think about the different investment instruments and the investment practice in general, one of the factor that very often discourages most people is undoubtedly time. Nowadays we are so used to the concept of “all at once” that we have lost the precious value of time.
How many times have we tried to learn something new, some new technique that could satisfy some of our desire or need, but then, since the results was not coming shortly, we gave up immediately by saying “it doesn’t work”.
Most of the time what we unconsciously thought was “I don’t want to study and practice, it takes too much time,” and then went back trying to find a new technique that promises an immediate solution. But again, we thought it would have taken too much, so we kept looking for the “all at once” and effortlessly solution.
Hardly ever we have found what we hoped for, in fact many of our desires and our aspirations are often left unfinished. Just think about that time when we tried to study a foreign language with one of those courses that promised to make us learn it in 24 hours, without any effort, just by listening to the tapes.
Then when we found out that instead, to really learn it, it was required a serious study and especially a lot of practice, we immediately abandoned our purposes.
This is what most people does.
The time needed for the investments
Some, instead, behave differently.
Some dwell on the first technique, or even better, they take some time at the beginning to find a technique that seems worthy, professional, suited to their way of being. At that point, they remain focused only on that, and they give themselves the right time to learn it, knowing that every day, spending even just a few minutes, they will become more and more masters of this new discipline.
These people give themselves time, and they also give time to the technique to make sure it expresses the results.
When you invest is exactly the same thing. Suppose you invest in a strategy of Forex trading, a strategy that statistically wins 65% of the time it opens a transaction. You must have clear in mind that, once you start, you have to leave enough time to your money to work with that strategy.
Let’s suppose also that for an unlucky situation, the strategy ran through a bad conjuncture in which that 35 % of losses, as was statistically predicted, come, but all together and all at once. Many make the mistake at that point of not giving time for the strategy to accomplish its cycle.
They take themselves out, they withdraw their money, and in that moment those 65 % of winning percentage started to come, here’s how that reasonable expectation materializes into a real revenue. Too bad for those who had left before it was realized.
When also will power is missing
The time factor is also the reason why many prefer to entrust their money to other investors, so that the latters will make the choices for them. They didn’t have the time, and maybe also the desire, to learn how to do it on their own.
As recent history has taught us, these people have given control of their money to other people, they trusted them, and this trust, unfortunately, has not been repaid. Often those who entrust their money to other don’t even know where their money will end up, or what will be actually bought. And that is when they get bad surprises.
As Warren Buffet says
“Risk comes from not knowing what you are doing”.
Aside from the varied world of scams and companies that implement them (the most popular recently was the Madoff’s one), once a person entrusts his money to another, he inevitably loses control over it.
Who manages it, many times don’t really invest it where there were some possibilities, but only where their private or corporate interest was.
In your opinion, a company that has strong interests in construction companies, will not use your money to invest in buildings? If they would have done so decades ago it would have been a bargain. But if they still continued to do so while the housing bubble was bursting, the story would have been different. That would not have been reasonable expectation, but only personal interest.
The importance of the correct time
That’s why taking the time to learn how to invest, and leave your money the right time to bear its fruit, are certainly two of the most important factors for the success in this discipline.
Linked to the time factor, there are also the expectations on how much and how quickly you want to earn. Even here the situation is simple, ie, to make your money work intelligently and as safe as possible, it takes the right time and the right approach.
As you have seen, the right time is needed for your investment to make its cycle and demonstrate that reasonable expectation. The right setting of your strategy is fundamental to allow your fund to survive in any circumstance, to resist in the negative situation, and to have always the strength to start again.
To explain it better, if you have an investment account of $ 10,000, and you invest everything in a strategy that risks the 50% for trying to double the capital within 3 months, then you are putting your money in a big risk. If your intent is to double or triple your capital in a few months, I assure you that, within a few months or even less, like a few weeks, your account will be halved, if not burned completely.
To find out if a gain percentage in a short time is too exaggerated, try to convert it into a loss, and ask yourself if you can accept it. For example, if with an account setting you are convinced to get the 50% return on the capital within a month, try instead to ask how it would be if, in a month, you’ll lose half of your account, because almost certainly it will happen just that.
I guess that now you might ask: “How long this “right time” you are talking about is?”, “What are the timelines?”.
Warren Buffett says
“Our favorite holding period is forever”.
Now, in order to not start with a time period so extreme, that could cause some problems for those who do not have the same experience of who has been the richest man in the world (and still remains in the top 5 positions thanks to the art of investing), with respect to the point of view we are going to show you for Social Trading, the time period we prefer is definitely “one year”, for two main reasons.
1) Before choosing an investment system, you must be able to see the performance of at least one year. I don’t mean you have to stay for a year to observe it. I mean you must be able to access the data of all it has done for at least one year, with the help of special tools that can make it easy to read them. And if you have 2 or 3 years, even better.
2) Once you have reasoned about how you want to invest, how much you want to invest, on who you want to invest, and you’ve done all the calculations, considering the reasonable expectations but especially the risk you want to take, at that point you have to let this strategy run with your money for at least one year.
Of course, there may be exceptions, but these are good starting points. If after only a month, for unforeseen events, everything starts to go against your expectations, there’s obviously no need to wait a year to intervene.
In normal cases, if the conditions that have led you to make a certain kind of choices remain valid, then you have to leave enough time for your investment to work, and a year is usually the right time to be able to draw your own conclusions.
Then, there is the time you have to give yourself to learn this new discipline. On this factor, now you have an edge because we have created a complete path to show you how to invest with this new opportunity called Social Trading.
But please, do not jump immediately ahead, remember this lesson, give yourself the time to read all of the courses, at least once, but even better if you read them twice.
Metabolize all the concepts. Then start.
If you make one accurate step at a time, you will arrive straight and precisely to hit your goal. Those instead who run in a disorderly way and jump the steps, they are more likely to miss completely the target.
Usually people, even though they had understood the importance of time, at the end of a reflection they tell me something like “It takes too much time anyway. Do you know that it would take me at least 2 years to invest and get the result I want? “.
To all these people I’ve always answered with another question:
“Well, will your goal be closer 2 years from now if you don’t even begin?”.
How to set a proper investment goal for you
Knowing how to set a goal is something very powerful for an individual psychology.
However, doing it right is not so obvious, and it requires good analytical skills, but not of external factors as you might think. Let’s continue to understand what we mean.
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
(The Art of War – Sun Tzu)
So he said this famous Chinese general and philosopher lived 2500 years ago. At first glance it may seems the usual cliché, but in the reality the concept he wants to express goes well with the psychological foundations that underlie the investing art.
Let’s start by making a clarification: when you invest there are no enemies, there are no good nor bad ones. When you invest, there are the goal you want to achieve, and the related risks. So, we can start by changing the Sun Tzu sentence in “If you know your goals and know yourself, even in a hundred investment you will NOT be in danger.”
First investment goal: being master of your own money
Being masters of our own money, which translated means also to invest personally, having a goal and, above all, having the theoretical foundations to be able to reach it, places us in the favorable position of knowing what are the risks we can encounter.
Knowing the risks associated with the achievement of a specific goal is really the starting point for a good investment. It would not make sense to start any activity without first having established what would be the risks. To continue without knowing them can easily turn into irresponsibility.
Second investment goal: knowing yourself
Once your goal is clear, and then you know all the risks related to it, at that point you have to make another type of analysis, but directed toward yourself.
You have to be honest, to admit your limits, to predict your possible reactions and your tolerance levels.
To make a practical example, let’s suppose you have two investment strategies available. Both aiming to achieve a 50% profit of your initial capital. The first statistically succeeds in just one year, risking 50% of your fund, while the other takes two years statistically, but risking only 20%. Which of the two investment strategies would you choose?
Many respond without fail that they would choose the former. “Why choosing the latter if the goal is the same, but the first one takes half of the time to get to 50%?”. And for many this would indeed be the best choice. But let’s try to imagine a possible scenario considering the first strategy.
We begin our investment, and by accident the strategy enters a negative period, and within 3 months you get that 50% losses statistically forewarned. Although it is not easy, try to imagine how you would feel if after 3 months you would have not yet accumulated a single dollar of earnings, but rather you would see your account totally halved. I can assure you that for very few in the world that would not be a problem at all.
Nobody likes losses, and losing half of the capital can really be a bad shot. Anyway, in losses you can also discover the spirit, the courage and the steady nerves of an investor.
In fact, the savvy investor who had used the strategy 1, passed those three months and finding himself without half of his account, would analyze again all the conditions that led him to choose that strategy. He would pass them all in an analytical review and would reason with a clear mind. He would conclude that the right conditions are still in place, so he would decide to continue with the strategy, and he would then be rewarded.
After the negative moment, the strategy begins to scores excellent profits and in the following nine months the account recovers all the losses and reaches its target even before the year.
Now, this is just a fantasy scenario, and with a nice happy ending, but you can imagine how many would not be comfortable at all with that kind of risk, despite the prospect of the saved time might be interesting. Many people, knowing themselves and their possible reactions, would prefer to choose a safer way, that arrive at the same result, in twice the time, but also with less than half of the risks.
Knowing yourself also means being aware of the condition or situation you find yourself in. A pensioner may have a different time horizon from a young worker just come of age. But not necessarily.
A pensioner might want to invest on a very solid and contained plan just to save his retirement from inflation. Or he might want a more ambitious plan for a portion of his savings, to try to leave something more to her grandchildren.
A young man, in the same way, could look for a strategy for a capital he’s planning to accumulate for at least 20 years, for which he wants to be conservative and not risk to have surprises. Or he might aim to double the capital in 2 years to buy the car of his dreams, and because of that is willing to risk more.
These are all examples to make you understand how the goals may vary depending on the personal circumstances of each one of us.
Goal means gain, but it means above all “possible risk”
In this regard, Peter Lynch says that the
“key organ for investing is the stomach, not the brain”.
He doesn’t mean you should not reason about the decisions and you should rely only on instinct.
He more wisely means that, once assessed the situation and made the necessary reasoning, if inside you, even at an emotional and physical level (in the belly), you feel that something is wrong in that investment, for example, that you would not be able to bear the risks, then you definitely need to, at least, stop and reconsider, if not abandon the project altogether.
So, do you know yourself deeply enough to understand what your goals are and the risks that you would be able to bear?
How to invest and work at the same time
In the introduction we said that investing means, very simply, to let money work for you, in your place.
But looking at the matter from even an higher point of view, we can ask: “How many ways there are to make money?“. The answer is still very simple. The methods are only two.
“People at work” or “money at work.”
As you can see, we are already working on the second one. But to give a complete picture we need to say a few words for the first method too, and perhaps these few lines would be the most important to allow a real change in the financial life of every person.
Working for investing
“People at Work” essentially means that the work of people creates value, which is then turned into money, both in the case of an employer who makes other people work, both in the case of a employee who is paid for his work.
If you are like most people, as almost all of us are, you are an employee of an employer, either the state or a private individual, that every month pays you the hours of work that you have done for him .
At that point, what do you do? You take that money, you go to the bank and you pay the mortgage, you go to the car dealer and you pay the car, you pay the expenses of the home, you pay the debts, you pay for medication, and maybe you also pay your child the pocket money. At the end of the month there’s practically nothing left, but there it comes a new salary and the cycle begins again.
But what is the meaning of all this trivial speech? The reason for these words of mine is that I want to pass you the concept of
You may have noticed that in the payment list there were almost everyone, they only missing were was you. Because here it’s the fact: the most important thing you need to start doing from now on is to pay yourself, and not as last, but absolutely as first.
What does it mean? It means that the first thing to do, whenever you get the money you earn through your work, is to take a part of it and put it aside. The best method is to open another bank account and transfer there the sum every time. But it’s important to do it right away, because the most important person in your financial life is yourself, and paying you first every time is the most sensible thing you can do.
Doing it at the end of the month, when you’ve already beared all the other expenses, becomes more difficult and exhausting. In addition, scientific experiments have shown how it’s easier for people to set aside a sum at the beginning and then live with the rest, rather than living knowing that you have that sum to be saved at the end of the month.
So, do it immediately. To pay yourself first every time is the most important step to obtain those resources necessary to aim at your financial freedom, a freedom that can be achieved just through the investment practice.
Investing for not working
Going back to the introduction, at this point, many think they have to work and pay themselves many years before they can have enough capital to invest, always convinced that for investing big capitals are needed.
As we have already said, this is absolutely not true. And also, investing a sum each month, even if small, can lead to great advantages over those who invest all at once. Let’s make an example to better explain.
Let’s suppose you and a friend decide to invest in the shares of a large company you believe a lot in. Your friend invests all his capital and buys all the shares he can, given the share’s price at that time.
You instead show a bit of sense, and you decide to buy shares in packages, each month, with fixed capital payments. What happens? It happens that, since share’s prices don’t just go up, but sometimes also down, in some month you end up buying shares at a cheaper price compared to your friend, in some month instead not.
It has been shown that by buying in this way, statistically you will end up having more shares than your friend who instead bought them all at once.
Even in the case of a trading strategy this system works very well. The ups and downs of a strategy are comparable to the ups and downs of the price of a share or a financial instrument. In simple words, to give new funds to the strategy in installments over constants period makes sure to spread and optimize the risks over a long time period, in order to obtain a greater benefit.
The evolved worker
Now you’ve finally clear the sense of this lesson. Work and pay yourself first each month allows you to do three things.
- To be always sure to capitalize your manual labor, so you don’t lose all your earnings by paying others.
- To start making money in the second way, ie letting money work for you.
- To gain advantages over time, acquiring at the best prices statistically the new units of your investment.
Now, we have the two main instruments, human labor and money, ready to let us gain other money. In the next lesson we will look at the third and last component, ie the concept of compound interest.
The power of Compound Interest
“Compound interest is the eighth wonder of the world”.
So said a certain Albert Einstein, what we all know to be the scientist by definition. Don’t be scared though, it’s not about mathematical concepts or theorems, impossible to understand for normal human beings like us. It’s really not. Indeed, perhaps is one of few cases where school math becomes useful and interesting.
Compound Interest definition for dummies
Let’s start by giving a definition of what compound interest is. Compound interest is the interest that, instead of being withdrawn, it’s added to the initial capital that generated it.
This means that for the next period, the interest will be accrued on an amount made up of the initial capital plus the interest accrued in the first period. Continuing, in the third period, the interest will be accrued always on the initial capital, and both on the interest accrued during the first period and the interest accrued in the second period (which are themselves accrued on the interest of the first one).
And so on for each period that is added to the calculation. Maybe this way understanding how compound interest works can seem complicated, so let’s proceed as usual with an example to clarify the concept.
Compound interest Calculation
Let’s assume that both you and a friend have an initial capital of 10,000 $. You both choose an investment plan that generates a 10% per year, but your friend every year decides to withdraw the accrued interest.
Five year later, your friend has collected 5 times interest for 1,000 $, which added to the initial capital made a total of 15,000 $. You instead have decided to harness the power of compound interest, so every year you have reinvested the interest accrued the year before.
After the first 5 years your total capital is 16,105.10 $. Compared to your friend you’ve earned 1,105.10 $ more.
Other 5 years pass. Your friend has a total of 20,000.00 $, while you, reinvesting the interest, have reached 25,937.42 $.
Now you begin to understand the power of compound interest. After other 5 years, your friend has a total of 25,000 $, while you, beyond all expectations, doing absolutely nothing, will have total of 41,772.48 $.
We can create this major difference with an annual interest over a period of only 15 years. The chart below instead shows what would happen if we could do the same for a period of 40 years.
Not bad, isn’t it?!
Compound interest: the secret is time
In order to function and to unleash their full potential, the basic compound interest factor is time. Without the proper patience you won’t be able to reach that fundamental mathematical advantage to allow interest to mature significantly on themselves.
Now, we have made an example by taking a fixed-rate performance with annual payment. Let’s look at compound interest using instead a replication strategy, as it can be in Social Trading.
With a Social Trading strategy your account will automatically open operations of a certain weight, a weight that will be decided firstly according to the size of your initial capital.
Now, let’s say you get an average monthly return of 5%. Leaving them on the account, at some point you’ll be able to increase the weight of the operations that will be replicated, because your capital, increased due to interest, will allow a greater “firepower”.
And so on, the concept of compound interest is also repeated in the case of a trading strategy.
Now that you understand what is compound interest and the power to reinvest them, try to imagine to put together everything you’ve learned so far.
Now you know that time works in your favor, that the more you take advantage of time, the more it will pay you. Now you know that the first thing to do is to pay yourself, and you can do it by adding a fixed amount to the initial capital each month. Now you know that, in addition to your constant payments, there’s also compound interest that will rapidly increase the power of your investment machine.
So, to those who think that we can invest just by having a large capital and managing to get a large percentage of return, you can now explain that there is another way, which does not require large capital or large percentages, but just a little patience to allow time to multiply your money.
Why Investing in knowledge is the best investment
As we already said, investing in no way means to bet or gamble.
Investing is based on studies and statistics, in order to find reasonable expectations of success and trying to exploiting them with a specific strategy. This means that studying will never hurt for the purpose of investing.
As Benjamin Franklin said
“An investment in knowledge pays the best interest.”
The more you study, the more you deepen an argument and becomes master of it, the better. This is an absolute rule. However, there is still a risk for those who decide to study and deepen, a risk you must have clear from the outset, because it affects virtually everyone. Even the greatest investors have been affected at least once.
Investing is not predicting
We are talking about the risk of “believing you cannot make mistakes.”
To put it in other words, believing to be always right and not seeing anymore the circumstances that are saying the contrary. No matter how extensive your studies were, the market will punish you severely if you’re not willing to admit you were wrong, even if all your arguments predicted you were right.
The market is based on people and their decisions, not on mathematical laws, and, as we know, people very often tend to take irrational decisions. Fear and greed are the two emotions that drive any market.
These two human conditions are indeed analyzable, but they will never, and I repeat never, be translated in perfect mathematical laws.
Even a strategy that scores 90% of the time will make you go broke if you’re not willing to accept that 10% of times in which it loses.
This happens often with those traders or investors who don’t want to shut down their loosing operations, or don’t want to abandon bad investments and admit the mistake, because they are convinced that sooner or later they will come back in their favor.
Investing doesn’t mean challenging the market
In the financial market circle, everybody knows that market takes no prisoners. Even the most solid strategies will make your account fail if, on the other side, you will insist in challenging the market.
Sir John Templeton said
“The four most expensive words in investing are: this time is different.”
Do not ever challenge the market. The market is always right.
Study, set a strategy and follow it, both when it wins and when it loses if the initial conditions are still there.
If they are changed, reason with a cool head if it’s still appropriate to continue on that road, even if this would mean to admit the error and a cash a loss. There is a saying that is often used in business, investment and trading.
“If you’re not willing to accept a small loss, sooner or later you will suffer the worst loss of your life”.
Be careful, this is a fact.
What is an investment portfolio and how it works
“Investment Portfolio” is definitely one of the terms we hear most often when it comes to investing. Let’s clarify what it is and what are its characteristics.
The investment portfolio is a set of financial assets appropriately combined to achieve a goal. Said simply, your portfolio is the set of all financial products and strategies on which you decided to invest.
Benefits of a diversified investment portfolio
The term portfolio goes hand in hand with another term, that is “diversification“. Yes, because the ultimate goal of having an investment portfolio is to combine different types of instruments that operate in different ways in order to reduce the overall risk of the investment.
If you have only instruments similar to one another, you run the risk of being unbalanced in both directions, both when you earn, but especially when you lose.
Try to imagine what would be your reaction if, at one point, you would see your whole portfolio losing. Of course, on the other side at times you would see everything also in profit, but you’ve already learned that it is much more important to dwell on the critical moments reactions, those in which there are difficulties and you need to hold your nerve.
In addition to this type of logical considerations, the creation of a well-diversified investment portfolio has been the subject of large number of professional and academic studies, obviously all based primarily on statistics.
The diversification and the statistics
It has been studied that the risks related to a well-diversified portfolio are statistically lower than those of a little or non-diversified at all portfolio.
In the case of stocks and bonds you can make different hypotheses. Considering bonds as the safer and stocks as the more risky ones, you can outline different portfolio methods. An investor who wants a conservative portfolio, with low-risk, will allocate at least 2/3 of capital to the purchase of bonds, maybe a small part in deposit fund, and the remainder will be spent in equities (stock market).
Vice versa, for those who prefer a more aggressive portfolio, with higher risks but also higher revenue prospects, at least 2/3 of the capital will be allocated to equities, and the remaining on bonds and funds.
Obviously these are very general and indicative guidelines. Within this framework we can build much more specific portfolios, based on the investor’s preference. In fact, not only you can choose between stocks and bonds, but also between different types.
Taking bonds into consideration, there are different categories based on their level of safety and return, and to identify them we use the rating agencies (Standard & Poor’s, Moody’s and Fitch) and the so-called “Rate” (ie votes like AAA, AA+, BBB etc).
So, if you wanted a more conservative portfolio, of the 2/3 of bonds you may allocate a 65% in government bonds or supranational entities, with a AAA or AA+ rating, and the remaining in bond with lower rating but more profitable coupons rate.
Same goes for stocks. For a more conservative approach, you can choose the shares of companies that generate solid revenues in the long term, or to be more aggressive you can choose young companies that are supposed to make leaps and bounds in the short term.
In other terms, we can say that building a portfolio is literally like making a bespoke suit. Obviously, this is also reflected in case of investments in strategies replication, such as Social Trading.
Investing the entire capital on a single Signal Provider is not the best solution.
Again, getting to know the parameters which we’ll analyze the performance of a trader with, you can distinguish the more conservative Signal Provider rather than the more aggressive, and work the same way in building a balanced portfolio according to your personal risk tolerance.
To conclude, there is only a risk when it comes to building an investment portfolio and diversifying, and it’s to exaggerate. As with all things, you need the right balance. Warren Buffet said that
“Wide diversification is only required when investors do not understand what they are doing”.
Investing Course: Summary and Conclusions
You have reached the end of this first path, the fundamental, the most important of all.
Having well understood what are the basics of the art of investing is the first step to begin the journey in the right direction. Besides avoiding bad surprises, you will benefit from significant time savings in achieving your objective. Those who begin without basis, in fact, wastes a lot of time in the beginning making the first attempts, and probably losing a lot of money.
Obviously, with a lot of intelligence and wisdom, using only his own experience, an investor could reach the same conclusions and principles buy himself, but it would take a long time and maybe even a lot of money before he get to the same goal. And moreover, if he’s not even wise, he can continue to repeat the same mistakes to infinity.
The art of investing: the salient topics
Let’s retrace the main points covered in this introductory course of the investing art:
- The methods for making money are only 2: people at work, and money at work;
- Pay yourself first, is the first step to capitalize your own work;
- Investing means let money work for you to create other money;
- Compound interest is the third weapon for effective investment;
- Time is your ally, the more you exploit it, the more it works in your favor;
- Knowing yourself is the foundation of any successful strategy;
- Diversifying your portfolio wisely reduces the overall risks;
- Study and deepen, but always be ready to admit the error;
Investing using concrete examples
In the next picture you can see the graphs representing all the instrument we have described in Lesson 3. Each of these instruments is considered according to three factors, calculated on a scale of 100 each: earning potential, inherent risk, and time, and assumes that each instrument is used in the right way, without exaggeration.
– For earning potential we mean the level of return that usually you can get from that kind of investment, putting things go in the right direction.
– For inherent risk we mean the possibility that your plan does not work as expected, and thus it materializes a loss or no gain at all.
– For time we mean the typical time horizon in which that particular instrument produces its effects.
Look at how Social Trading seems to be the most interesting of all the options. Clearly, these graphs are our own personal interpretation, but we are sure that if you will deepen a bit these topics, you will find that these images are very explanatory.
Moreover, such a view can help you in case you are thinking to combine several of these tools in a diversified portfolio, including among them Social Trading the way we are going to show you in the future courses.
We don’t want to suggest you that the best Social Trading in absolute terms. On the contrary, we hope you will become curios and deepen all these instruments, bonds, stocks, mutual funds, Forex, and maybe you will diversify your portfolio by including some or all of these instruments, together with Social Trading.
For sure, now you have the basics to tackle this route in the best way possible.
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