How to start investing? It is relatively easy to get lost in the financial world. Bonds, stocks, options, futures, and investment funds can quickly sound intimidating to novice investors. But you don’t have to. And in this article, we would like to explain how you can take the first steps.
After school, finding an affordable home, repaying study debt, a lost vacation, and building up a small savings account seems to be the most important financial priorities.
And then there comes a moment where you have some extra money available. And you don’t need that money right away. Then it’s an excellent time to see if starting investing suits you!
Why start investing?
There are several ways to build up capital. Think of a savings account, buying real estate, investing in bonds, or investing in shares. Apart from the savings account, equities are the easiest way to start building up capital.
And there’s no better time to start with shares than today!
For many investors, the reason to start with equities is straightforward: to strengthen their financial position, to supplement their pension, to quench their thirst, or to preserve their assets.
A higher return with investing
Historically, shares have yielded much higher returns than savings accounts, for example. For example, in the long term, the S&P 500 (the most critical American stock exchange) shows a return of 9% on an annual basis.
Of course, that 9% is a lot higher than the 0.3% you get in a savings account today. And that makes it worthwhile to take at least a look at whether an investment in shares is suitable for you.
With what amount should I start investing?
Whether you’re going for a pension supplement or perhaps investing because you don’t need a jar of money for about 10 to 20 years: it doesn’t matter with what amount you start investing.
It’s a misconception that you have to start with vast amounts of money to invest. You don’t need thousands of euros, even a few hundred euros is enough.
Take, for example, a dividend investment: an amount of $100 can rise to $5,997 in 41 years.
Perhaps 41 years sounds like a very long period. And it would help if you thought about that: investing is something you do for a more extended period. We see a minimum period of 10 years as an excellent guideline.
Do you need the money faster? Then it is advisable to think carefully about whether investing at the moment is something that fits your financial picture.
In any case, the graph above shows something important: if you invest, you can even get off to a good start with a few hundred euros. All you need is a good investment strategy and a lot of patience.
Of course, it’s also important to realize that 100 euros are just enough for one investor to pay for breakfast, while another investor can go shopping for a week.
That is why it is not possible to give one standard amount with which to invest. It depends very much on your financial situation. But for every investor, the following applies: Invest only with money that you can spare so that you can never get into financial trouble in the event of a loss.
How much should I invest?
Many of our readers have a fixed amount each year that they earn and save. And a good cause is to set aside a certain percentage of the total income for investment each year.
For example, a good goal would be to set aside 10 to 15% for investments.
For example, do you earn 50,000 euros on an annual basis after tax? Then 5,000 to 7,500 euros per year for the investment pot is a good idea.
Isn’t this a bit too much? Then, of course, you can reduce the percentage to an amount that better suits your financial situation.
We want to make clear here: who starts investing doesn’t have to worry about the starting amount but about the amount you can start investing in the coming years. That way, you can start building up assets!
What can you invest in?
Whether you start investing for a pension supplement or start investing for a higher return than the savings account, it is always important to look at the type of investment you will invest in. Of course, investing is not entirely without risk. That’s why it is essential to read up on it before you start investing money in something. In general, the more risk you take, the more profit you can make.
There are several ways to put your money to work in the market. Think about this:
Shares
– With a share, you buy a piece of a company. The value of this share can fluctuate.
– Companies spend shares on raising capital; this can be used to grow further, or for example, to pay off debts of the company.
– The vast majority of private investors invest in shares.
Bonds
– Bonds are loans to companies or governments, where it has been agreed in advance in how many years this loan will be repaid. In the meantime, you will receive interest on the loan.
– Bonds are generally perceived as less risky than shares because you know exactly when you will get the money back and how much interest you will receive on it.
Investment funds
– An investment fund is a mix of investments managed by a company. The compound differs from fund to fund: some funds focus entirely on technology, while others have a mix of bonds and companies in European markets.
– There are also index funds: these are funds that follow the index.
Exchange-Traded Funds (ETFs)
– An ETF is a basket of shares, bonds, commodities (in combination or individually) that you can buy and sell through a broker. These are listed funds.
– Index ETFs are the most popular variant and comparable to index funds of investment funds, with the advantage that ETFs are usually cheaper and easier to trade.
Which product is suitable for me?
Almost every asset manager or investment expert will indicate an investor to diversify a portfolio as much as possible. This means: instead of all your If you put eggs in one basket, spread it out by buying different assets.
For example, a well-diversified portfolio consists of shares, bonds, and ETFs. At the same time, a poorly diversified portfolio consists of 100% Apple shares.
Investment horizon as a measure
Which product is best for you ultimately depends very much on the investment horizon. Do you have a horizon of only five years, and do you want a smaller chance of large losses in those five years? Then shares are not the right choice, but you’d better look at bonds.
On the other hand, do you have 20 years? Then shares are soon the better choice, given the historical return.
However, buying shares can be challenging: you need to know which shares you will invest in and understand the companies; it is a lot easier for many investors to buy an ETF.
The most popular way to do that is through an index fund / ETF. An index fund follows a specific index such as the AEX or the S&P 500. Of course, this depends a bit on the index in which you invest. Still, in most cases, an index fund offers the best of both worlds: immediately good diversification in different companies and that in a passive way.