Written By: Malla Messo Click here for the post in Finnish.
NEW YEAR, NEW ME
The beginning of the year is a perfect time to start a new hobby. What if this year, instead of starting a gym membership, you would start investing? Investing is an excellent hobby because even if your motivation drops after few weeks and you only have time to check on your investments every once in a while, the starting phase didn’t go to waste – you can’t say the same about going to the gym.
CONTENT WARNING
If you are a expert in investing already, this post is most likely going to be useless for you, and I would recommend that you invest your time more wisely (see what I did there 😉). Then again, if you always feel like the language around you has switched to gibberish when people are talking about investing and the only thing standing between you and financial independence is the is the complex terminology and difficulty of getting started with investing, you have come to the right place.
WHY is it smart to invest?
Investing is a perfect hobby if you are left with some extra money at the end of each month and you are not sure what to do with it. Because of inflation, the cash you are keeping under your mattress is losing its value, as we are speaking. Then again, shares in the Helsinki stock market have had an average yearly return of 6,1% in the past 20 years. So, instead of the money you worked hard to save to be eaten up by inflation, you can put it to work for you. Makes sense, right? What makes this especially worthwhile is the compounding interest, sometimes described as the eighth wonder of the world, which motivates you to start investing as early on as possible. In short, the compound interest effect means that in addition to the interest on your principal amount, you also start to get interest on the accumulated interest over time. Therefore, it is said to be more important to start investing as early as possible rather than waiting for the perfect moment to start, because the longer your capital has time to accumulate interest, the more significant benefit the effect gives.
In the best-case scenario, you can also positively impact other people’s lives and the environment by investing. You can read more about this so-called impact investing from our blogpost IMPACT INVESTING & ACTIVE STOCK PICKING – WHAT, WHERE, WHEN AND HOW?.
WHERE does investing happen?
Next, it is time to think, where investing happens. The stock exchange is a public trading post where you can buy and sell shares of listed companies. To purchase securities in the stock exchange, you need to open a brokerage account, or an equity savings account in a bank of your choosing. When deciding on a service provider, pay close attention to the underlying fees. The brokerage account is an investment account that allows you to purchase stocks and other securities in the stock market. The equity savings account is much like a brokerage account, but it allows you to buy and sell shares inside the account without immediate tax sanctions. However, you cannot, for example, purchase mutual funds or exchange traded funds (ETFs) with an equity savings account. So before choosing what type of account you want to open, you should think about what features are best for you as an investor.
HOW to invest?
There is no ultimate correct answer to this question. I even dare to say that no one knows how to invest for real. However, there are some basic rules that are easy to follow to get started.
“ You should never invest more than you can afford to lose.”
Revise your current financial situation
Firstly, it is good to consider if you can afford to invest your money in your current life situation. Even though you can start investing with under 20 euros per month, it’s completely understandable that not everyone has that possibility. In this case, you should not feel pressured to start investing right now. Instead, you can put the idea of investing to the back of your head and return to it when the timing is more suitable. It is also good to remember that if you have some high-interest loans like consumer credit or credit card debt, you should pay them off before starting to invest.
Create an investment plan
When you have stated that investing is, in fact, possible for you, it’s time to make an investment plan. Before starting to invest, it is good to consider how much you can invest, what you will do if the value of your investments collapses and how long you will be keeping your money in your investments. A good rule of thumb for the amount of money to invest is that you should never invest more than you can afford to lose. Therefore, you should not invest money you might need in the near future. If you have a long investing timespan, the market swings won’t keep you awake at night.
Find an investment that’s right for you
After deciding your investment time horizon and the amount of money you want to invest, it is time to choose an investment that is right for you. There are a number of different types of investments from real estate to cryptocurrencies to choose from, but the most common objects for beginners are shares and investment funds. Shares are small parts of corporations. If a company is listed in the stock exchange, anyone can buy and sell its shares. Investment funds and Exchange Traded Funds are funds made out of shares or other bonds. If you want to learn more about investment funds, you can read our previous blog posts INDEX INVESTING AND ETF’S and FUND INVESTING.
Minimize costs
Just like when buying anything else, you should also pay attention to the prices when investing. For example, you should examine the transaction fees and management fees. When investing in funds, pay close attention to the management fees because while they may seem small – often less than one percent, even the smallest of difference can have a significant impact on your long-term returns.
Diversify your investments
Maybe you have heard of the saying that you should not put all your eggs in one basket, and the same thing goes with investing. There are many forms of diversifying, but you can for example, diversify your investments by timing, which means that you do not invest the whole sum at once but rather divide it into smaller amounts that you invest in a more extended period. If you do not do this, there is a risk that you buy when the stock market is at its high point, and then if the market drops it might take a long time for it to reach the same price level. You can read more about diversifying from our post DIVERSIFICATION.
DRUMROLL PLEASE – THE FIRST EVENT OF THE YEAR!
If you want to learn more about starting to invest you should stay tuned! AIC is organizing an online event fully devoted to this topic in February. There you have the possibility of asking all the questions you might have on your mind after this post. (NB Unfortunately, this event is held fully in Finnish.) Follow AIC on social media for more. You heard it here first! 😎
EDIT: You can now find the recording for our event Investing for Beginners with Jasmin Hamid & Antti Saari from our website.
USEFUL SOURCES FOR A BEGINNING INVESTOR:
aaltoinvestmentclub.com / INVESTOR RATIOS
investopedia.com / How to Start Investing in Stocks: A Beginner's Guide / Dictionary
nerdwallet.com / How to Start Investing: A Guide for Beginners
op.fi / How to start investing in stocks
investorjunkie.com / How to Invest Money Wisely / Investment Terms and Definitions You Should Know