by elmads

Introduction

Investing is a word that we’ve been constantly encountering in today’s information age. A word that has always been heavily marketed by the financial industry but is often misunderstood by people.

It is so broad that people don’t even know where to start because there are multiple approaches to this vast world.

And honestly, only a few methods will truly be applicable to each of us.

Successful investing means bridging the gap between our level of willingness to learn about it, applying those accumulated learnings, and incorporating them into our own lives and beings.

Possessing a fundamental understanding of investing is of paramount importance. Similar to any other field, comprehending its basic principles is necessary to understand its critical parts.

Before we move ahead, I just want to clear things out. Investing is not the first step in personal finance. Before a person invests his or her hard-earned money, he or she should first and foremost secure and sort out his or her financial core, the wealth protection side of personal finance.

To know more about this, see my blogs titled “Basic Financial Planning Part 1” and “Part 2.”

WHAT is Investing?

“It is the act of committing money or capital to an endeavour with the expectation of obtaining additional income or profit.” -Wikipedia.

“To put money, effort, time, etc. into something to make a profit or get an advantage” -Cambridge dictionary.

“Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains.” -Forbes.

“Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gain.” -Investopedia.

All these definitions are from several sources and, though they have different ways of explaining them, point out the process of putting money to work.

In short, it’s making more money with money. Making money work for us.

Or by simply taking this idea into other aspects of our lives, like relationships, specifically courtship, to make it more understandable. A man invests his time and effort in a woman with the hopeful expectation that eventually the woman will be able to like him back, making his investments fruitful in the long run. Nevertheless, the risk is still present even in such a situation because there is always an alternative outcome of rejection or, in the financial space, a poor or failed investment decision.

You can control the effort and approach, but not always the outcome. It’s the same with making our hard-earned money work for us.

Investing is Different from Saving Money

Investing is and will always be different from saving money. The former is making our money make more money for us, while the latter is for our own safety and security.

To understand this better, I always divide investing and saving money based on time frames.

What I live by and practise is that all my hard-earned money has a purpose in my life. I see myself and my family’s finances as those of a company, of which I am the chairman and CEO. I consider the money that comes in as my employees, whom I allocate per department with a specific purpose that completely aligns with the greater good and success of the company—in this case, myself and my family.

Just like with any other company, I also see my life with goals across time: short, medium, and long-term.

• For short-term financial goals, money that I’ll need within less than or equal to 3 years should be readily available, or if it’s in savings accounts, it must be easily accessed and used within the day. (Just sitting on a bank and flexible savings account)

• For medium-term financial goals, any amount that I will not need within 3–10 years (Bonds or high-yielding time deposits.)

• For long-term financial goals, any amount I’ll not need for a very long time, greater or equal to 10 years’ time horizon, (This is where I heavily invest my money on assets that I understand. These are assets with high volatility and very erratic price movements only int the short term, such as stocks and cryptocurrencies.)

My reasoning is that if the money we’ll need within 3 years is invested in stocks and cryptocurrencies, that can be problematic. Once the time comes that we’ll be needing the money, let’s say today, while the market is down from your average cost price of your investments, then you’ll be selling your assets at a loss. Instead of making more money from your investments, you lost a portion of them just because of the short-term volatility of the markets.

Or let’s just say you’ve invested the money you’ll need within three years in a property. How will you get that money if you suddenly need it now? Properties cannot be sold within the day, unlike marketable securities (stocks and bonds).

My personal rule of thumb is that any money I’ll need within 3 years should be saved; it doesn’t matter if that money will not make more money for me because it’s for my safety and security and short-term goals.

Our individual success with our own money management and allocation is rooted in our own goals from a practical yet ambitious point of view.

Investing ALWAYS Involves RISKS

There is no such thing as zero percent risk in the investment world. If someone says otherwise, then those people are likely wanting to sell you something. Therefore, run away from them! 😂

Even money placed in a bank savings account has a risk of permanent capital loss, like in the event of a bank’s bankruptcy. Though it can be argued that the risk of it happening is minimal thanks to the financial government agency that covers depositors’ money in the event that it does happen, but the element of risk is still there.

As with crossing the road, what are the chances that you can be hit by a car if you cross at a no-pedestrian crossing compared to a pedestrian crossing? It is a no-brainer that crossing a pedestrian road is safe, yet we couldn’t completely say that it is 100% safe. Drivers under the influence of alcohol and/or drugs, anyone?

So, what do we need to be aware of, then? It’s the levels of risk, the types of risk, the level of risk we are willing to take, and how to manage it depending on our personality, individual circumstances, and financial goals.

Investment Risks

One simple fact about risk, whether it be financial, mental, spiritual, health, or relationship aspects of our wellbeing, is that by doing nothing, you’re also taking a risk. Learn to handle risks!

And as usual, my favourite line “There’s always a price to pay for the life you choose”. Take accountability.

WHY Invest?

To Outpace Inflation

It is one of the main reasons, if not the main reason, why we should invest our hard-earned money.

Inflation is a normal occurrence in most economies worldwide. It spurs people to spend, which helps to increase the velocity of money within the economy through more investments, more jobs, and more products and services, which in turn increases economic output. But then it should be within a healthy inflation zone, which first-world countries’ central banks consider to be 2%–4%. More than that for long periods of time can be detrimental for both the people and the economy.

How does it help with spending? Here’s an oversimplified thought:

If prices increase over time, then what’s the point of buying it tomorrow if you have the money to buy it now? Because by tomorrow the prices could be higher than they are today, you might as well buy it now.

In our financial lives, we have goals that are time-bound —short-, medium-, and long-term aims. The problem here is that saving money alone for our long-term financial objectives is not enough to keep up with inflation.

Let me give you an example: I was born in 1990; a million PHP during that time is now worth more than 5 million PHP in 2023 (adjusted for inflation). Can you imagine just saving money to reach a million PHP today, then realising that once you reached a million PHP, you wouldn’t even be able to purchase the products and services that that 1 million PHP today could buy decades ago? Whew!😓

The buying power of money decreases over time due to inflation, so investing our money for our long-term goals would be the most important strategy to overcome the devaluation of our hard-earned money.

To Buy a Day Where You Don’t Have to Work for Money

People think that having a large salary is the only way to achieve financial independence and security. It is certainly important for us to generate a strong cash flow to support our lives and add leisure on top of it. But then we don’t realise that we’re still trading our time and effort for money. In short, most of us do active work to generate income.

Don’t get me wrong; there is nothing wrong with exchanging time for money or making money with the things that we love to do for the rest of our lives. But then we also must be realistic about the fact that our mind and body are not eternal. As with other living things in this world, our body will get old and deteriorate. Active work can only do so much for us, but once activity declines, so does our ability to generate money.

Learning how to invest and letting our hard-earned money work for us without requiring any physical labour or effort is one of the answers to this inevitable ageing process relating to our financial lives. Money doesn’t get old; it doesn’t need sleep; it doesn’t need food and water; it doesn’t need vacations; and most importantly, it can work 24 hours a day nonstop.

On top of that, investing is for everyone. You can do whatever you want with your life and career, like start your own business, become a neurosurgeon, strive to become a judge, become the CEO of the company where you are currently working, create the first effective AI robot, write songs, become an artist, and whatnot, and still make your hard-earned money work for you.

In short, you can focus on your career, make money on top of it, and then allocate that portion of money for passive investments. It’s creating two paths to wealth. One with your career, while the other is with your investments.

Creating your own investment is like having a business partner that you can trust; instead of a person, it’s your own money. While you strive hard to take the path and career you want in life, your money is also making money for you on the side without you even exerting too much physical time and effort for it.

It’s the best of both worlds. It’s a pragmatic approach.

To Supplement Our Savings, as Saving Money Alone Might Not Be Enough

It is better to understand this through a scenario. See the image below.

As shown above, saving money alone will not be enough to attain our financial goals over the long haul. Sure, increasing our income will be of substantial help and could be enough to attain our long-term financial goals, but this can only be true for a small number of people and might not be applicable for all.

Hmm, to somehow know the answer to the quote above, we need another scenario for this.

What’s your point in the image above, Evan? All of them reached a million dollars anyway.

Look closely; there is one person who made a lot of money by just investing a small amount of money consistently over a long period of time (when added all together, it amounts to a small sum of money compared to others, but there is this one person who got more bang for his investment buck because this person invested early).

Let me explain this per person.

• Mads: She started to invest at 50 years old  and invested $3,500 monthly for 15 years, which amounted to $630,000 of her total money invested. This means that she made $370,000 by just investing.

($1,000,000 goal retirement fund minus $630,000 total money invested = $370,000 money made through investing).

This is a 58% increase from her total invested capital of $630,000. Not bad!

Let’s now go to the other person in the example, shall we?

• Eyah: She started to invest at 40-years old; she invested $1,500 monthly for 25 years, which amounted to $450,000 of her total money invested. This means that she made $550,000 by just investing.

($1,000,000 goal retirement fund minus $450,000 total money invested = $550,000 money made through investing).

This is a 122% increase from her total invested capital of $450,000. That’s more than a double! Absolutely fantastic!

Now that you get the idea, I’ll simplify the next two.

• Tin: She invested a total of $294,000 for 35 years. She made $706,000 by just investing. A 240% increase—that’s a threefold increase.

• Evan: He invested a total of $189,000 over 45 years. He made $811,000 by just investing. An eye-watering 429% increase in his total capital invested.

Now we go back again to the question I asked regarding the quote “The best time to invest was yesterday; the second best is today”. is this true?

From a mathematical point of view, the statement above is completely true! But then we are talking about people investing their hard-earned money. Human beings have individual uniqueness and life circumstances, which we must first consider.

Nevertheless, if a person has the financial capability to invest as early as he or she can, then by all means, he or she should do it as soon as possible because the math is on his or her side.

HOW Does It Work?

The Brain and Power of Investing

Compound Interest is the brain and power behind investing.

If Simple Interest = interest calculated on the initial principal amount

Then, compound interest = interest calculated on the initial principal amount and accumulated interest of previous periods.

The way I explain this is through a basic mathematical equation.

As shown above, we have two columns, one for simple interest (left column) and the other for compound interest (right column).

In simple interest, the interest we get is based ONLY on the amount of money we placed. This is the kind of interest we get from a bank savings account.

On the other hand, compound interest is in a different league than its cousin, simple interest. The interest we get from it is based on both the initial amount of money we placed and the previous interest we got. Thus, the longer we use compounding interest to grow our hard-earned money, the larger the growth it will achieve, but only if done correctly.

Let me give you an example scenario to show you the different outcomes of using simple and compound interest. See the image below.

📝NOTE: Inflation is not yet included in the returns above. If it is included, then $12,000 saved under the mattress would be worth less (in terms of buying power) after 35 years.

Investing Early is Crucial

You have to remember that you should, as much as possible, secure first your personal financial core (cash flow management, emergency and rainy-day funds, life and medical insurance, and debt management).

There is NO Perfect Way to Invest Your Hard-Earned Money

• A breadwinner considers the welfare of his/her family when making financial decisions.
• A single mom is doing everything by herself.
• A soon-to-be father changes his priorities in his career.
• A loved one died.
• An individual resigned from his 9-to-5 job and started his own small business.
• A person was laid off from his job.
• A couple recently migrated to another country.
• An individual was newly diagnosed with a disease.
• An employee got the dream position she has always wanted.
• A son recently took in his elderly parents to take care of them.
• A married couple will be retiring in 2 years.

Your life is unique, you have your own successes, failures, fulfilments, hardships, advantages and disadvantages, and you have your own angels and demons.

The perfect financial approach to handling your money and investing it is the one that perfectly syncs with your personality and priorities in life. It’s not about how other people handle and invest their money; it’s about you and your family. That’s how you must think about it. #beselfaware

Learn and then apply the basic knowledge and principles of finance and investing to your own life, tailoring them to the financial life that you want for yourself and your family.

WHEN to Invest? Things to Consider

Be Aware of Your Financial Situations, your Financial Responsibilities

This again boils down to personal finance. The best way to explain this is by showing you the financial planning pyramid. (See image below).

What we must focus on first is the wealth protection side of personal finance.

Firstly, cash flow management. It is finding our first source of income, which is the base of our finances. Everyone started somewhere, and that somewhere is usually through employment; there are other ways than this, such as freelancing and starting a business. Realistically, the majority of people start with getting a job, and from there, we build our finances from the bottom up.

Secondly, under wealth protection, is risk management. Here comes the emergency fund, the rainy day fund, and life and medical insurance.

Saving Money for Safety and Security

Other people argue that some of these are not important and should not even be prioritised. Though I don’t completely agree with those who have this view, I do understand where they are coming from.

You see, emergencies and unpredictable negative life-changing events have a low chance of happening to some people, but they are not completely risk-free. This means that such an event in our life can still occur and this is where the principles of personal finance covers us. It’s financially protecting us when emergencies and unexpected events in our lives happen.

It is always important to be ready for every situation. Always be prepared, resilient, and antifragile.

Like the weather, life is unpredictable,

Prepare for the worst, even when the situation is amicable.

The rain will come, it’s just a matter of time,

But with preparation and skill, your future will shine.

Don’t be fooled by the sun’s gentle rays,

For storms may come and last for days.

Learn to weather the monstrous storm,

And emerge stronger, better, and at your best.

“It’s better to be a warrior in a garden, than a gardener in a war.”

—Miyamoto Masushi

On top of this, we also must investigate our debts (if we have any) and learn how to manage them.

Debt is a serious financial problem for everyone. It is literally a hole in our finances that can sink our ship if not handled properly.

It’s hard to live today without going into debt, I do understand that, so understanding it and managing it will be of paramount importance in our financial journey. 

“Pay off your debt first. Freedom from debt is worth more than any amount you can earn.”

—Mark Cuban

Is that everything, Evan? Well, not really, because we must consider our priorities in life. Everything that we want and need in the future will most likely require money, and planning beforehand is of the utmost importance.

Recall that I explained in this blog’s portion “Investing is Different from Saving Money”? where I base my money allocation depending on my goals and when I aim to achieve them. That’s one of the things we need to consider as well.

This is where knowing your why is important.

Know Your Why

“Without goals and plans to reach them, you are like a ship that has to set sail with no destination”

— Fitzhugh Dodson

Knowing your why is also knowing what investment approach will be suitable to reach your whys. But before we focus on what method we need to use; we should first think of our “Whys”.

Know Your Risk Tolerance

Once you have your whys, you then need to be aware of your own risk tolerance. The level of risk you can manage and the types of risk (this is dependent on your chosen asset class and investment vehicle)

• A measure of how much risk you can handle as an investor
• Factors that determine your risk tolerance
  • Amount of money you can lose.
  • Your time frames
  • Emotional ability to handle risk.
• Determines what kinds of investments you should pursue.

Over time, as you get used to investing and learn more about it, you’ll be less risk-averse than when you initially started your investment journey.

Learn, apply, and dip your toes first in the water, then eventually take the plunge.

Always remember this: There is no perfect way to invest. The investment approach you choose must always fit your own financial situation and objectives.

WHERE to Invest?

Have you ever wanted to try to invest but then, when you do your own research, you just find a million pieces of information about it that confuse you more?

Are you still having the same problem today? I bet you’re having headaches now from just taking in all the information in the investment world. This space is so broad that reading a single book about it won’t be enough.

After you understand the WHAT, WHY, HOW, and WHEN of investing, it is the WHERE that will take a chunk of your time in making your own investment approach decision.

And to do that, we need to first grasp the basic information about the basic asset classes in the investment world. It is by understanding them that we will find a way to utilise each asset class to fit our own personalities, life circumstances, and financial goals.

The 5 Basic Asset Classes

The 5 Basic Asset Classes

• Bonds/Money Market: If you take this asset, then you’re lending your money to either the government or a corporation. This is a debt security —a formal legal agreement and certificate that has monetary value and can be traded — where governments and corporations borrow money to the public.

“Debt is one person’s liability but another person’s asset.”

-Paul Krugman

Bonds Asset Class: Making Money From Debt Of Others

• Stocks: An asset class where once you own stocks and shares of a particular publicly listed company, you then become a part owner or shareholder of it. If the company’s businesses and its management do well over time, so does your investment in them.

How Shares are made and how the Stock Market works

• Real Estate: the asset class that everyone in the world knows and is mostly understood better than others. This is the most popular and oldest asset class in the world. It is the ownership of land and properties.
  
  It is a no-brainer investment. Why? Well, it’s as simple as this, we have limited land with an ever-growing population worldwide. Supply and demand mechanics at its core.

• Commodities: All things we need in life are derived from commodities. Food, clothing, our home, and transportation, to name a few, when you take this asset class, you’re pegging on a certain commodity to do well over time, though this is the asset class that is heavily tilted on supply and demand. A little change on the supply or demand sides of a commodity can spell substantial gains or losses for its owners.

Then outside of these traditional assets are the alternative assets such as cryptocurrency, art, luxury watches and other more.

The Alternative Assets

There is indeed a lot of information, and for you to be able to find which one is the most suitable investment vehicle for you will require your own due diligence in understanding each asset class. But not everyone is willing to take the time to understand the nuances of investing and learn more about it on a deeper level.

The question that I always encounter from everyone who wants to invest but doesn’t want to exert too much effort and time into it is, “What is the simplest method that I can take to make my hard-earned money work for me and is also beginner-friendly?” And my answer to this question has always been consistent. It’s through PASSIVE INDEX FUND INVESTING.

Where, as beginners, can we actually invest?

So, let’s say you already have a good income flow from a stable job, as a freelancer, or from having your own business. You have also built your emergency fund and some rainy-day funds. Have secured your own life and medical insurance and have little to no debt. And finally, you are starting to plan to start investing, with the knowledge of the WHAT, WHY, HOW, and WHERE of investing, but don’t know in what investment vehicle to start putting your hard-earned money that you’ll not need within a decade or more. Then just take the simple passive index fund investment approach.

There are various pooled fund types of investment vehicles, such as investment unit trust funds (UITFs), closed-ended funds, and variable life insurance (VUL), which is a mix of investments plus life insurance, to name a few. There are differences between each type of fund, but all of them possess a fund manager who makes the investment decisions on behalf of the fund’s investors.

So why index funds? low-cost fees, it copies a certain index performance, it’s passive, it takes away the hassle of making investment decisions, analysis, and risk management, to name a few, and you’re betting your hard-earned money on the success of either the economy of a country, a sector, an industry, a region, or the world — depending on what the index fund specifically invests in.

Mutual Funds

How to Spot a Legitimate and Safe Investment Broker

I walk the talk. A significant portion of my salary is invested in a Passive Index Mutual Fund under Vanguard Group. I’ve made several blogs relating the Vanguard group and also the breakdown of my 2022 Investment portfolio. See the blog links down below.

📣 https://elmads.com/?p=9606 – 2022 Portfolio Performance “Into the Global Investment World”
📣 https://elmads.com/?p=5232 – How to open an Index Fund Investment Account – Vanguard
📣 https://elmads.com/?p=5265 – Vanguard UK – The FTSE Global All Cap Index Fund
📣 https://elmads.com/?p=5435 – Vanguard UK’s Ready-Made-Portfolios

“The best thing money can buy is financial freedom”
In short, it buys you more TIME.

-Rob Berger

Knowledge is my Sword and Patience is my Shield,

Evan Louise Madriñan / elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.