So I guess, if you clicked on this post, you want to know how to get started with investing. When I started reading about investing, I felt like there were just words thrown at me like Roth IRA, 401k, or Asset Allocation and you’re just like whaat?
But after some time, I started to understand bits and bits until I got a generally good overview.
I know it might seem like a lot and you probably feel overwhelmed but I will explain everything step by step about how to invest your hard-earned money.
This article is also available in German.
Table of Contents
What happens to your money over time?
If you’re money just lies around at home or in your bank, it actually looses value over time, thanks to the inflation rate.
Inflation is generally around 2%-2.5%. That means that every year, stuff costs about 2% more than it did the year before.
In this statistics, we can see how the price for bread has changed over time compared to the price it had in 1997. In 1997 one kilo gram (about 2 lb) costed CHF 5 (about 5 Dollars) and in 2020 it costs almost CHF 10 (10 Dollars).
If you would keep CHF 10’000 under your Pillow and the inflation rate is 2% you’re money would be worth less, exactly CHF 9800 after 10 years. So you would loose CHF 200 just like that.
You’re loosing your money by keeping it under the mattress, which isn’t good.
If you put your money in a savings account you get interest. Interest is the additional money you get for putting your money in a bank, it’s what they pay you for you “loyalty” so you stay at their bank. The interest at a typical Swiss bank is between 0.01% to 0.05%.
So if you have an interest of 0.01% and you have CHF 10’000 in your bank account you get an additional franc every year. At the end of the year, you have CHF 10’001.
But because the inflation rate is up by 2%, you’re still loosing money over time.
In Switzerland the inflation rate is much lower compared to other countries.
You might think now: But I am young, I don’t need to think about retiring for many more years. But let’s look at this:
Imagine you have a savings account with a 6% interest rate and with CHF 100 in there. If you save CHF 25 every month and put it in that savings account, you get CHF 4’279 after 10 years.
But you actually just saved 3000 of the CHF 4’279. So you got CHF 1’179 without doing anything!! Isn’t that amazing?
But now imagine doing this for a longer period of time:
After 30 years of saving only CHF 25 (which is like one time eating out in Switzerland), you get CHF 16’615 basically for free.
You can calculate also saving a bit more, by going to this site: Investment Calculator.
Albert Einstein knew what he was talking about when he said the compound interest is the eighth world wonder.
I hope you realized now, that it is important that you start caring about your money now. The earlier you start, the more compound interest you will end up with. It is important so you can fulfill your dreams without having to worry if the money lasts for all the bills.
Where to start investing your money:
What does every person want when they start investing? We want our money which we worked so hard for, to be safe from being stolen or losing money. But we also want to get more money. And just in case we suddenly want to do a backpacking trip, the money should be available quickly.
We all want return (get more money), liquidity (money that is quickly available) and security (no loss of money).
But we can never have all of them.
If someone tells you there is a product that gives you a lot of money, is safe and you can always get your money quickly, just stand up and leave. You can trust them as much influencer that promote skinny teas.
You have to decide which corners of the triangle matters most to you.
Security and Return
This is actually the hardest. What you can do here, is buying bonds (when you lend money to a company or the government and they pay you back with a bit of interest) but their interest rate is not very high. So, you will make up for the inflation rate but probably not really much more. There isn’t anything else that has the same amount of security.
Security and Liquidity
We can’t really say if gold counts to this category. In unstable situations, many people buy gold, but the gold market can also collapse. But you can always trade it everywhere to liquid money (but that doesn’t mean I would recommend you to do it).
Liquidity and Return
To get money quickly but also get a nice return, I would recommend buying shares or index funds. You can quickly sell a share with two clicks online. And of course, you can get a good return with them.
There is a saying that goes like this: The rich people don’t invest because they are rich, but they are rich because they invest.
It took me some time to realize that I have a completely wrong image of people who handle with bonds. For me, whenever I thought about shares and investing, I had a picture of a man in a suit who sits in his fancy chair in front of a computer. But actually, it’s not like that.
The market where you can trade shares, is like a market where you can buy food. There are different stands with different deals.
Sometimes the apple at one market is a bit cheaper than at another market. But at another market, there are different apples. It’s different at every market.
Every market works with deals and demands. So if avocados are seen as a “superfood”, and everybody wants to buy avocados, they will get more expensive. But if there is a saying that avocados are unhealthy, fewer people will buy avocados. The dealer will then lower the price, so he can sell them avocados.
The price of a share isn’t what he is actually worth, it’s more what the people are ready to pay for it.
When you buy a share, you buy a part of a real company. If you buy a Tesla share, a small part of the Tesla company belongs to you.
There are two ways you can make money from shares:
- If a company has a really profitable year and they are feeling kind, they are choosing to pay out a dividend to their shareholders. So maybe they say they want to pay CHF 10’000 which will be split up evenly to the people that are owning a share. So if you own 1% of that company, you will get CHF 100. It’s a way of the company to return some of it’s profit to the investors.
- The second way is that the share gets more expensive with time. So if you would have bought a Tesla share in 2010, one share costed 3.84 USD. Today one share 416.30 USD. If you would sell your Tesla share now you would get a lot more money than you did when you bought it.
How do you buy a share?
If you want to buy a share, you have to go through a broker. Earlier there was a person who you would call and say: Hey Dude, I want to place an order to buy some shares from Tesla.
But thankfully we don’t have to do that anymore, because there are a lot of online broker today.
You can make an account on an online broker and then buy the shares from the company through that. I would recommend buying from swiss quote, that’s the online broker I use as well.
When I started getting interested in shares and investing, I started to look at the market and asked myself: What bond do I have to buy now? Which one will give me the most return? I felt lost because there was so much information and I didn’t know where to start.
But the good thing is, you don’t want to decide which is the best share.
Because with shares, it is like this: If you buy the right ones, you can get a lot of money. But if you chose the wrong bonds you can lose all your money.
That’s why it is important to have different shares. If you would only buy shares from car companies and suddenly nobody wants to buy cars anymore, you would have a problem.
The advice that most people give beginners is, to invest in Index Funds.
What is an Index Fund?
There are two parts to an Index Fund, the Index part and the Fund part.
The fund part is where people pool their money, so multiple investor would invest in the same fund.
The fund would have a fund manager who decides what companies the fund is going to invest in. If there are 100 people who invest in this Index Fund and each person gives CHF 100, he could split those 10’000 in 20% Tesla shares, 20% Apple shares, 20% Amazon shares and 40% Nestle.
This fund performs well because the price of these shares are increasing, because these companies are doing well.
The index part refers to a stock market index. So, a stock market index would for example be S&P 500 which is the 500 biggest companies in the USA. Apple, Microsoft, Amazon and Facebook are all companies form America, so they have a big representation in this stock market index.
If we look at the whole S&P 500, we can get a general idea of how the U.S economy is going.
We can see that there is a general going upwards, but there were also some crashes like in 2008. It took some year for the market to recover but after 5 years it was on the same level again. (that’s why you shouldn’t invest for less than 10 years)
A fund automatically invests in all of the companies in the index.
Why is this good?
There are many reasons, but the first one is, that it’s really easy to invest in an index fund. As beginners we ask ourselves: Well where do I invest now?
But when you invest in an index fund, you don’t have to worry about that. You already have the solution 🙂
Secondly, your money is distributed over many companies. That means if one sector (for example cars) are not doing well, it won’t affect your money a lot because you’re also investing in clothes and oils and tech…
Thirdly, index funds are very cheap.
An index fund is a passive administered fund, where a computer replicates the index, respectively the market. There are no strategies or decisions to make, that’s why a computer is able to do it.
There are also funds that are being administered by a real person, a fund manager. They decide when and where to invest. That means the success of the fund depends on the fund manager and his knowledge.
We all know that fund managers don’t have a bad salary. Six numbers salary plus a bonus isn’t a rarity and that money has to be paid somehow. Up to 25% of the win can go to the fund manager because of his excellent accomplishment. (Which often is just luck because it’s very hard to strike the index)
But trying to be better than the index is really hard, and many people can’t strike it.
Because a computer is doing all the work for an Index Fund, you won’t ever have to pay as much as for an actively administered fond. It can be up to 10% less money that you have to pay.
All of my invested money is in index funds.
But isn’t investing risky?
Naturally there is this anxiety of what if I lose all my money?
But if we take a step back, the only way you can lose your money is when you buy something and sell it for less.
The only way you, you can looe your money in stocks is when you buy a stock and sell it for less than you bought it for.
When you’re investing in stocks and shares, those are long-term investments. You shouldn’t put any money that you need in the next 5 years in stocks and shares.
In the long-term the stock market goes up, like we saw in the S&P 500 example. There is no way that all the biggest 500 companies in the USA would go bankrupt overnight.
If they would then there is an apocalypse and the money in your Index Fund wouldn’t be your biggest problem.
I’m not a financial advisor but in my opinion, there is no way you could lose all your money if your money is distributed well.
Because like I said, if you would only invest in car companies and suddenly nobody wants to buy a car anymore, well then you would lose all your money. But that won’t happen with an Index Fund because you have so many different companies in there.
Investing in the stock market short term can be risky but in the long term, the market always goes up, so you will end up making more money in the long run.
When should you start investing?
It doesn’t matter when you start investing, but the earlier the better. The longer you leave your money in the stock market, the more it compounds.
But you want to make sure your debt is paid off, because even though gains compound, losses compound as well. So, you want to pay that off as soon as possible.
Also, you want to have an emergency fund. That is cash that is enough for 3 to 6 months for you to live.
You also don’t want to invest money that you need in the next 10 years. We don’t know how the market will develop, we could have a crash in the market tomorrow or in 5 years, nobody knows.
How much money do I need to get started in investing?
The answer here is easy: start with whatever you have right now. A lot of us don’t think we have any money, but I bet we all have some money in a savings account. It doesn’t matter if it’s just CHF 100. Because if you start saving CHF 25 every month from now on, you will end up with CHF 16’615 more in 30 years.
It’s useful to invest small amounts of money because compounding is always good. The sooner you start investing, the more compound you get.
How do I start?
Firstly you want to find an online broker, here you can find the best in Switzerland. What you want to look out for is, you want the fees to be as low as possible and you want to be able to invest in Index Fund.
Invest some time researching more about this, it’s the best way to spend your money. But don’t wait for too long!!
I know this was a lot of information, but I tried really hard to make it as easy as possible. I got all this information by educating myself, I read for example “I will teach you how to be rich” by Ramit Sethi, which I can 100% recommend. He wrote the book really good and it shows you step by step how to manage your finances.
I am by no means a professional and I can’t 100% guarantee you what I wrote in this post. This is my honest opinion.
But I hope that you realized how awesome it can be to let your money work for you.