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Personal Investments: Being Smart About The Basics

Personal Investments: Being Smart About The Basics

by Pavel Lapshin (student of The English Square)

 

When asked about investments, people usually think about earning 30% per annum or more via picking up the right “future Facebook” share, forex gaming or following robo-advice. All these might be viable strategies, just like blackjack might be beneficial for a lucky man or a mathematician doing card counting[1]. The common advice for these strategies is not to invest more than you could lose.

 

So where would you invest in what you do not want to lose?

 

Up to 70% of the whole world’s investments are passive – pension funds and major banks hold bonds and shares in order to capture the whole market growth in the long-term. Passive investments are low-cost as there are minimal fees for asset management and transaction costs.

 

The whole investment process starts with defining your risk and returns appetites: usually the wealthier you are, the more risk you might take (as your portfolio has a greater ability to absorb potential losses in the moment) and the older you are, the less risk you want (as you might not have enough time to recover from the potential loss event). The rule of thumb is to have a percentage of bonds (low-risk investments) which equals your age – e.g. hold 25% bonds when you’re 25, but increase to 50% (and even more) when you are over 50.

 

All your assets are considered part of a single investment portfolio: your house, your bank account, share options from your employer – everything aggregated should compose the asset mix which is right for you. If at retirement your house is your major asset, consider reverse mortgaging to finance your living costs.

 

What are the main asset classes?

 

Bank deposit – the simplest and the most popular investment, however the interest rates are at their minimum levels almost all over the world.

 

Stocks (shares) – are the most talked-about investment vehicles. The bad news is that a share does not guarantee you anything: dividends are completely discretionary and shares are last to be paid in case of insolvency (after employee salaries, taxes, trade creditors and bonds).

 

From 1900 to 2018 S&P500 showed 9.7% average annual growth (before inflation, with dividends reinvested)[2]. However, remember that in a particular time span the return might be way lower. Consider negative returns during the 2008 recession.  Be careful with developing countries’ stock markets – they might be volatile, thinly capitalized and opaque. Do not pick up particular stocks unless you are as confident as Warren Buffet – simply follow the market and invest in indices, ETFs or mutual funds.

 

Government and corporate bonds – are fixed income instruments, as the interest payments are pre-determined. Unlike the bank deposits, bonds have a secondary market price, which changes following the market interest rate: the higher the market rate, the lower the bond price. The theory behind bond-trading is math-heavy, ensure you have a seasoned asset manager to oversee your fixed income portfolio.

 

Real estate returns are usually low, but real estate is an inflation hedge, e.g. its price goes up to more or less compensate the inflation (stocks are inflation hedge too).

 

Private equity, hedge funds and fine arts are all interesting alternative sorts of investments, however these are not usually accessible for mass market – as the entrance level is from $10 to $100 million.

 

So no active investment at all?

 

You, your network, personal brand and business skills are your major investment. So ensure you invest heavy enough. Think of reading one book related to your major a month, which makes up to twelve books a year. So, imagine how this will raise your professional value!

 

Looking at 2018 bitcoin (and other crypto) price data there is a clear up and down oscillation, so why not buy low and sell high? In hindsight this idea looks awesome, however remember – past is a poor indication of the future performance. So don’t get carried away.

 

What should one start with?

 

Think about your investment targets, your time horizons and liquidity needs and then talk to one of the investment advisors. Investing is easy and interesting – just start properly.

 

[1] See Edward O. Thorp article in Wikipedia to learn more about successful card-counting strategies

[2] https://dqydj.com/sp-500-return-calculator/

One thought on “Personal Investments: Being Smart About The Basics

  1. Good article. I agree that investing in ourselves is the investment that we should make.
    I only think that to “simply follow the market and invest in indices, ETFs or mutual funds” is not the best advice. In my opinion, if you follow the market instead of anticipate the market, the probability of you incurring in losses is higher. So, when you have uncertainty, the best thing that you could do is to not do anything. It is best to not invest if you don’t know why you are investing. Can you explain to me what the meaning of your statement is?

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