With investing there is an extremely broad range of options, this is a simple guide for those who want their wealth to grow hands-free, if you are happy to take some risk on the stock market but don’t want to be trading or even monitoring your investments regularly then this is the simple solution.
TLDR: Index Funds + Regular investments.
What is an Index Fund
Investing in an index fund means you’re effectively invested in the top companies of a region, there are other types of index funds, such as bonds etc, but this gives you the basic idea. Instead of investing in one company or bond etc, you are investing in the “Index” of them, therefore your risk is very spread out.
Can I lose money
Yes. Index funds still expose you to the risk of losing money, however, with time and patience most investors will be ahead. You only “realise” losses or gains when you sell your investments.
Think of your investment as purchasing tickets, if you buy your tickets for $10 and their value later drops to $5, you have not “lost” this money unless you then sell your tickets at that price, therefore we can avoid loss here by being able to wait until our investments are worth $20 or $30 for example.
To avoid loss it is important to only invest money which you could lose. Meaning if the value does come down, you do not need to take money out of your investments. This also means it will be less stressful if / when they do lose value for some time.
Over time though we see index funds performing fairly well, for example from 1970 – 2017 if we look at Australian and US stock markets, the growth is averaged out around the 10%pa mark, there have been significant financial crashes between these periods, but overall, there is significant gain to be made.
$10,000 invested from 1970-2017 would be worth close to a million dollars
When To Start Investing
The most important thing to do is Start. You might not have any specific savings goals or plans to be using your money for anything just yet, but when you do, you will be thanking younger yourself for putting aside funds for your future, even if this ends up being your retirement fund.
The above example is looking at a very long-term investment, but even within a short time frame, this strategy can help us generate enough capital for starting a business, taking a year off, home loan deposit, or whatever is important to you.
The ideal investment strategy is to be investing an affordable amount on a regular basis. Most people can afford to spare $10 per day, so $70 a week is a relatively easy investment Target.
Outcomes: its impossible to predict the percentage your chosen index funds will grow, but 10% is a reasonable example. So let’s say that you invest for 10 years, here are some potential outcomes;
Initially deposit $10,000 and deposit $70PW = Roughly $80,000
No initial deposit but deposit $70PW = Roughly $60,000
Obviously having an initial deposit helps, but in the end, even if you start with just $10 a day, you can have a good amount of capital in the end.
Getting started: The first choice is how much you will initially invest and where you will purchase your index funds from. Keeping it simple you can either;
Pick your own index funds and purchase these from your chosen stockbroking service, always look for the lowest fee option here. Sometimes there will be minimum investment amounts for each fund as well as for the brokerage, for this reason, this option is best if you intend to initially invest 10k or over (roughly).
Use an investing Service like Acorns, Stash, and many other “Micro Investing” services, these allow you to get started with low initial deposits of around $10. It is important to note that they might charge regular fee’s which you might not incur when buying the index funds yourself.
It’s as simple as that, keep it simple.
Please note: investing = financial risk, please consider your personal financial circumstances before investing your money. Only ever invest money which you can afford to lose as there is always the chance that your investments could completely crash and burn, leaving you with no money from them (this is unlikely, but hope for the best, plan for the worst). In line with that, I would also recommend not borrowing money for investing as the interest rates on your loan will offset any potential gains and this exposes you to larger risk. Also, pay down any debt before you begin this investment strategy. Enjoy!