Finance and Money - Spending, Saving or Investing - part 3

When it comes to investing, there are many options that you can choose from. However, please keep in mind that whenever you are investing, your money is at risk. As I stated in the previous post, your money is never 100% guaranteed to make a profit, regardless of your investment choice.

Before moving any further, I would like to remind you that I am not a financial analyst, I am not telling you what to invest in, and, you should always do your own extensive research when investing. I am only presenting to you my view on investing.

As I said above there are multiple ways of investing, depending on your risk tolerance levels. Let's quickly enumerate the most common ways of investing and give them a risk level (again, this is just my opinion on the matter).

1. Investing in state/government bonds - risk level: very low;
2. Investing in indices - risk level: low to medium (depending on the index you choose!);
3. Investing in a particular company - risk level: medium to high (depending on the company you choose!);
4. Investing in real estate - risk level: medium;
5. Investing in commodities (I'm thinking here of gold, silver and other pretious metals that don't have a very high volatility) - risk level: low to medium;
6. Investing in cryptocurrencies - risk level: high to very high;

There is one investment that I specifically left out of the above list. Is it less important? No! You can always invest in YOURSELF! Yep, that's right; sometimes, the best investment is in yourself - either by buying a course that will help your career move forward, or by learning a new skill that will help you in a side hustle, or even taking some time off in order to relax and approach everything in your life with a clearer focus and more positive energy! Trust me, it matters A LOT to keep a positive and clear mindset.

Now, let's talk a little about passive vs active investments; having a clear understanding of this is going to help you figure out your investment strategy!

A passive investment is an investment that you either do once or on a regular basis and you don't concern yourself to much about it. A passive investment usually requires a long investment time (a few years to a couple of decades) in order to achieve good results! 

"The hell do you mean by that?! It's my money! How can I not be concerned about it?!"

Well, the idea with a passive investment is that your assets have a very low to medium risk level. These assets do not require daily checks in order to adjust the investment strategy. 

This is a good time to talk about state/government bonds - these investments have a very low risk level. The idea is that by you buying these bonds you are lending money to the state/government for a specific period of time; for example, one year. You also know from the start what the interest rate for your money will be; for example 4% for one year.

At the end of that period, the state will give you back your money with the corresponding interest. 

So, let's say you invest 10000 dollars in state bonds which have a return rate of 4% for one year. Your money is "locked" for that one year and, when the bond reaches the maturity date, you will receive 10000 dollars, your initial investment + 400 dollars, the interest/profit you made. 

"What do you mean "locked"?! What if I need to get my money back faster?" 

Well, in this case, you will have to fill in some paperwork and you will get your money back, but you will not get any interest for the time your money was "deposited". 

At this point you might be wondering if this way of investing is profitable at all ... I mean, the interest you are making is quite low, right? True, bonds usually have a low interest rate, but they are the most secure way of investing! Also, you usually don't have to pay taxes on the profits you make from bonds - this may vary from country to country, so please double check!

So, to conclude with state bonds, you buy once and you don't have to concern yourself with anything else for the duration of the bond's term. Also, you are almost 100% guaranteed that you are going to make a profit (I'd say that it's a 99.9% chance). This is one of the most passive and safe ways you can invest your money.

"The profits are low😢 Can't we do better?"

Well, here's the thing with investing - in order to have a bigger profit, you generally have to increase your risk level. So, there's no wonder that state bonds have a low profit return. They are the safest way to invest. 

Now that you understand what a passive investment is, let's dive a bit deeper with some other options - specifically, indices. So, what is an index? You can think of it as a bascket of companies, so that when you buy the index, you buy stocks from all the companies in that index. 

Some popular examples are the S&P 500 (top 500 leading stock market companies from the USA), Nasdaq, Dow Jones, FTSE100 (the main index that tracks prices on the London Stock Exchange). 

If you want to invest in an index, you have 4 options. 

1. Buying a mutual fund that tracks the index;
2. Buying an index fund that tracks the index;
3. Buying an ETF (Exchange Trade Fund) that tracks the index;
4. Buying the stocks yourself, based on the index's companies and their allocations;

Be very careful if you want to go with option 4 - the main disadvantage is that you will have to do a lot more work to "keep up" with the activity of the fund that you mirrored. Why? 

Let's consider the following example. An index fund comprises of 4 companies: A, B, C and D. 

For some reason, company D is not profitable anymore or there is another company, E, which is promising better profits. In either case, the fund will most likely rebalance the portfolio and replace company D with company E. 

If you are buying the index fund, you don't have to worry about these operations. They are done automatically or manually FOR YOU - this is why there is a fee/commission/tax being applied for mutual funds, index funds or ETFs.

For this reason, buying the stocks yourself is, in my mind, no longer falling into the passive investment strategy; to be fair, it's not 100% active investment either ... it is somewhere in between, kind of like being in Belgium and Netherlands at the same time 😃

The best passive investment strategy, in my opinion, when it comes to indices is to do what is called a DCA, which stands for dollar-cost averaging. To put it simply, this means that you regularly (weekly, monthly or once every two weeks) invest into the index (or indices) for a given period of time (ranging from a couple of years to a couple of decades). You buy when the markets are up, you buy when the markets are down (some people actually sugest to buy MORE when the markets are down 😉). The idea is that over a longer period of time, your investment should yield a nice profit! 

For example, the S&P 500 index, for the past century has delivered an yearly 10% profit return rate. Now, as I said multiple times - investing has risks - just because the S&P 500 has a historical return rate of 10% doesn't guarantee anything for future investments! It can go up 20% or it can go down 10%. Nobody knows what the future holds! 

We'll close this post talking a little about commodities - specifically, pretious metals like Gold and Silver.

These can be good choices for passive investments. The DCA strategy can also be applied here! Before going further, let's bust a myth that says "Gold can only go up in value". Below is a chart showing the price of gold starting from 1973.

As you can see, Gold hit an all time high in 1978-1979, followed by a correction and a consolidation period of more than two decades. Eventually, it did surpas the high from 78-79, but only in 2008 - that's a 30 years timespan! 

The way I see it, passively investing in Gold and Silver are good choices for creating a backup to your emergency fund. Chances are that your money will go up in value but, as proven above, it's not 100% guaranteed. Also, there may be periods of time in which we see the prices of gold and silver stay pretty much flat.

Now, of course, there are other commodities that you can invest in, such as Oil, Coffee or Copper. However, in my mind, these commodities require more technical and fundamental analysis and they don't quite make it into the passive investment plan. They have a higher volatility associated. 

Look at the chart below, which shows the price of Oil, since 1983, and compare it to the chart of Gold presented above - there are more "ups and downs" when we look at Oil - this is volatility.

I got the above chart from here. 

In the next post we'll continue with what I consider to be the last passive investment option (from the 6 points presented above) - real estate. We'll also talk about active investments, specifically, buying individual stocks and/or cryptocurrencies. 

If you stuck with me till the end of this long post, thank you for time and I sincerely hope you got some value out of it.