Why You Need to Invest
Ricky Gervais has this joke: “The CEO of Nike has amassed a fortune of 5.2 billion dollars. For a female worker in one of his sweatshops in China to earn that, she’d have to work 7 days a week, 8 hours a day, for ten thousand years… … … but they don’t want to!”
He’s being ironic, of course – it’s all part of the sociopathic nouveau riche persona he uses in his stand-up.
But while he might be funny, he’s also wrong. It would take that long simply to make 5 billion dollars if all she did was work. But if she invested some of that money, it would grow, and thanks to compound interest she’d have 5 billion in no time at all.
How a Chinese Factory Worker Can Make 5 Billion Dollars in Only 300 Years
If our factory worker could squirrel 100 dollars a year into an investment paying 5% a year, after 100 years she’d have 275,000 dollars.
I think at that point we could let her spend the $100 on herself. You know, as a treat. So we stop asking her to contribute that 100 dollars a year, and let the 275,000 keep growing without her help. After another 100 years she’s got 36 million.
Surely we don’t have to wait another 100 years for that 36m to grow to 5 billion? Sadly, we do.
4.7 Billion in Only 3 Centuries
A bit short of Nike’s CEO’s networth, but I think the Chinese factory worker (more likely her great(to the power of x) grandchildren) will be happy enough with it.
Cool, right? She’s happy, her grandchildren are happy, and best of all, YOU LEARNED SOMETHING. You learned that putting your money to work will make you richer than you ever thought possible.
[I love that compound interest calculator, by the way. It’s on the Dividend Ladder website. I use it to daydream about how much money I’ll have in the future. If I can live to be 177 years old I'll be able to buy Manchester United.]
Before You Start Investing
No doubt you’re super excited to start making your first billion dollars. But soft! There are just a couple of things to think about first. You need to think about the psychology of losing money, and to consider the types of investments that suit you.
Your Risk Appetite and The Psychology of Loss
When we say things like ‘this investment produces 5% a year’ or ‘shares go up 10% a year’ we’re talking about averages. One day the value of your investment goes down, the next it goes up. If you buy shares and turn on the TV, it’s pretty likely the newsreader will say something that means, ‘You, you investment noob, you idiot, you lost money today. AHAHahahahAha!’
How would you react to that? Are you the type of person who would lose sleep if your investments dropped by 30%? If so, you wouldn’t have slept much in 2008 when the stock market tanked. And you would find owning a buy-to-let property stressful – think of all those broken windows and tenants who flood your bathroom.
For most people, losing ten dollars causes more pain than gaining 15 dollars brings pleasure.
Is there a solution? Not really - that's your brain chemistry. But to some extent you can train yourself to ignore minor setbacks or you can be more conservative with your investments. Just think about what you can and can’t deal with.
Don’t Shove All Your Eggs in One Mouth
You’ve probably heard men in suits blabbing about ‘diversification’. That’s just another way of saying ‘don’t put all your hamsters in one cage ‘cos they’ll eat each other’. And actually it makes a lot of sense.
This chart thingy shows various financial products (it looks more complicated than it actually is) ranked by which ones performed best over 20 years:
Take a closer look at the bright orange one labeled ‘MSCI Emerging Markets’. If you bought that you’d be investing in China, India, Brazil and so on. From 2003-2007 that was the number 1 investment. Then in 2008 it was the very worst one. Next year it was best again. It’s pretty much always either the BEST investment or the WORST investment.
This chaos would seem to make it hard to choose what to invest in, right?
Kind of. But there’s a simple solution – don’t choose. That’s right – invest in everything. When one thing is down, another is up. Next year it might be vice versa. But on the whole, your investment will grow.
Does it sound complicated to buy all these financial products? It’s actually not – you could do it with just a few mouse clicks. Normal people would never invest in all the products listed in that chart – I only include it to show the importance of diversification.
Now that we’ve thought about how it feels to ‘lose’ money and understood the importance of spreading risk, let’s dive into the types of investments that are out there.
Types of Investment
Property, (inc. Buy-to-let)
“You don’t wait to buy property, you buy property and wait.”
I’ll tell the story of how I bought a shithole in the worst part of Manchester, at auction, without having ever set foot in it, in a future article. Suffice to say that I wouldn’t recommend doing it the way I did it. But I was lucky enough to buy at the bottom of the market and sell it at the top. Whoo!
Buying your own home might be something you want to do, for example because you want to repaint your home without asking for anyone’s permission. Here’s what I did with mine:
But is buying your own home a good investment? It’s complicated, but probably not. You might want to do it anyway, which is fine. But if your goal is to make money as fast as possible, there are better investments.
What about buy-to-let? It’s been a good scam for a long time – your tenants pay your mortgage, banks freely lend to you, the government makes it all very cosy for you. But in the UK at least, changes to the tax code are making it less attractive. [External article – Is the Buy to Let Party Over?]
I have two small flats that I rent out, and I’m happy with the income. I won’t be writing much about this topic because once you’ve got a property up and running there’s not much to say. My property manager (AKA my mum) takes care of broken boilers etc. If property as an investment is something you want to look into more, there are loads of resources online. I’d suggest browsing Bigger Pockets. (You can also invest in property via shares and peer-to-peer lending – see below.)
Good for –
- people with DIY skills
- people with good local knowledge
- people who like to own tangible things
- people who aren’t afraid of taking on debt
Risk: mostly low
Returns: something like 5-10%
Home Improvements e.g. Solar Panels
You spend 10,000 pounds buying solar panels, and it saves you 1,000 pounds a year on your bills. That’s a return of 10%. Winner!
Also – improving your windows; brewing your own beer; turning your garage into a room you can rent out.
Some of these don't make money, but will save you money, which is even more important. See my [future] article about frugality. You do need a bit of cash handy though.
Good for –
Returns: depends on subsidies and that. But you can normally calculate the return quite accurately
The Lottery and Premium Bonds
No! These aren’t investments! It’s gambling! And don’t get all wise-cracky saying ‘the stock market is just gambling’. It isn’t. In a casino, the house always wins. In the stock market, normal people like you, me, and Warren Buffet win. If you want to play the lottery, let’s make a deal – you send me a pound every week, and once every 14 million weeks I’ll send you 10 million pounds.
Good for –
Risk: You are 100% guaranteed to lose
The main reason I revamped andrewgirardin.com was to write about the other websites. But you don’t have to slog away at a website for 2 years before you start making money – you can buy ready-made websites, just like buying a business. Most people find it bizarre but it’s not that hard. I’ve done it twice.
I’ll write a thing about it.
Good for –
- people who can write
- people who can click a mouse in the right place
- people who like tearing their hair out because they can’t work out how to get a line break on the fucking page
Risk: Quite high
Return: Amazing. Up to 60%. If things go well you'll get your money back in under 3 years
This is basically a bunch of people lending money to a business or a person. Everyone chips in 20 pounds so the risk is spread. I’ve been doing it for years. You can follow my progress in this article.
The risk is a bit higher than keeping your money in the bank, but if you invest 20 pounds in a hundred businesses you’re pretty likely to see your money grow. Returns range from 4% to 12%. Nice!
Good for –
- people who want to invest in local businesses
- people who want a better-than-average return
Return: Very good. 4-12%
There’s no mysticism to buying shares. You’re just buying a tiny piece of a company. You know, like Apple, those guys who make those phones. Or Ford, who make cars. Or Hewlett-Packard, who make infuriating products that make people bitter and resentful.
It’s cheap and easy to buy shares these days. You set up an account with an online share dealing broker (the best one depends on where you live). Send some money into it (or better, make a standing order to send money every month) and you’re ready to trade. Choose a share, click ‘buy’, and voila. You are now a shareholder. It’s easier than getting a phone contract.
When you own a piece of a company they share their profits with you in the form of a dividend. I own a bit of Zurich Insurance. I paid 180 francs per share, and every year they give me 17 francs per share. So I should get my money back in 10 years, and still have the share.
Maybe not ‘fun’ exactly. And most companies don’t have such generous dividends. Also, buying just one stock is a big risk, so I rarely do that now. Instead I buy something called an ETF.
An ETF is a thing you can buy and sell just like a share. How to explain it? It’s like Fantasy Football – when Wayne Rooney scores a goal or one of those American fellas scores a really good punt you get points in your fantasy league. ETFs are like that – they just copy whatever the ‘real’ stock market is doing. You can buy one that mimics the S+P 500 or the FTSE 100 - that’s called an index fund.
There are three main reasons you should invest like this. First, it’s super cheap. Most investors don’t realise how much money they’re losing to management fees. ETFs are totally passive, so there’s no thinking, no paperwork, no messing about. That makes it really cheap, which makes a ridiculously big difference over 20 years or so.
The second reason is that buying an index ETF makes more money than trying to guess which companies will do well. Have you ever heard that a monkey who randomly picks stocks will do better than a professional? It’s true. So don’t try to beat the market, just buy the whole market.
The final benefit is that it’s easy – there’s literally nothing to think about. Just buy the ETF and forget about it. Even someone who knows nothing about shares can get into the stock market this way.
Good for –
Risk: very low over a long enough timeline (but with ups and downs)
If you want an easy-to-follow, complete guide to shares, you won’t find better than the JL Collins Stock Series.
You can buy these on the same platform you buy your shares on. Buying a bond is like lending money to a government or a company. But the return you get is quite low.
Good for –
- people who want to have some of their money in a slightly safer place
Risk: very low
Return: very low
Gold, Oil, etc.
When everyone starts losing their minds about the latest crisis in China, Russia, Timbuktu, they sell their shares and buy gold. So if you have a bit of gold in your portfolio it might balance out some of the ups and downs. Or it might not.
Personally I don’t buy gold because gold doesn’t do anything. If you invest in a rail company you build the infrastructure of a country, you provide jobs, you help people travel. Gold’s only virtue is that it’s shiny. I also don’t invest in oil because the energy sector is too complicated to understand.
But if you do think gold is cheap right now, or oil will go higher in the future, it’s quite easy to buy some on your share dealing platform. Look for a related ETF.
Good for –
- people who want a bit more variety
- people who think gold is some sort of magical metal
- people looking for a higher-risk, higher-return type investment
Return: Who knows?
My Asset Allocation
At the moment it looks like this:
- Property – 60%
- Shares – 25%
- Websites – 8%
- Peer-to-Peer – 7%
Not as diversified as I’d like, but I’m working on it.