Learning to invest should be a basic skill for anyone, but very few people devote time to this task. A person’s economic future is determined by:
- The money he earns
- The percentage you save of the money you earn
- How you invest that money you save
To know how to start investing these 3 points are fundamental. But most people focus only on the money they earn, some get to the second step (saving) and only a few take the third step (investing) seriously. The 3 “legs” are very important for the economic future, but if you had to name one of them as the least important when it comes to accumulating wealth I think it would be the first one; the money you earn.
If you earn a lot of money but you spend it all, you cannot create wealth. However, it is possible to earn little, save a lot, invest well and obtain a very good result. Time is also very important, accumulating good wealth with a low income in a short time is extremely difficult. But over a long period of time, time and discipline mean that practically anyone can significantly raise their standard of living.
The most important investments are:
- Stock market: I think it’s the best option for many reasons.
- Real estate: Historically it has been the second most profitable option after the stock market. Overall it has been a good investment, although not as good as most people think. The investment in real estate, in practice, has many disadvantages that are not usually taken into account when talking about it in a theoretical way, as you can see in the previous link. The real estate market is pending a reform that would radically change the valuation of real estate; the liberalization of land. If the land is liberalized in a real way the value of the real estate will fall significantly.
- Fixed income: It is considered the safest, but its real profitability (the one that takes into account inflation) is very low. It can be used temporarily, but it is not a good long-term investment because of its low profitability. Obviously it is preferable to stay in a fixed income for a while than to buy overvalued shares. But it is not possible to “live off the income” by investing in fixed income, because the moment you stop reinvesting the interest, the real value of your assets begins to fall and eventually disappears in the long term.
- Objects of art: It is very complicated for people who are not very expert. Most art objects cannot even be considered as an investment, since only very high quality ones deserve this consideration. Forgeries, fashions, etc. make this type of investment very difficult. Besides, they do not provide a rent and the same work can have very different prices at the same time depending on the place of purchase, who is the buyer and the seller, etc.
The first thing that should be done is to design the management of the patrimony and to decide what percentage of the total is going to be invested in the stock market. It can range from 10% to 100%, depending on each investor.
To invest in the stock market there are 2 options:
- Investment funds: What are investment funds and what are their advantages
- Direct investment in the stock market: Advantages of investing directly in the stock market
I think direct investment is more interesting, but for some investors it will be preferable to invest through investment funds. But before deciding to invest through funds I think you should read the articles Stock indices do not reflect the dividends paid by companies and How to match (and beat) stock indices so that you understand well the implications of your decision. You should also bear in mind that direct investment in the stock market and investment through funds are compatible options.
Before you start buying shares you should choose the strategy you will use to invest in the stock market. You can use more than one strategy, in which case you should decide how much money you will devote to each strategy and open a stock account for each one. The same account should not be used for several strategies, as it makes it difficult to evaluate them and a bad strategy could slowly and “silently” “eat” the profits of good strategies. They should be separated so that they can be easily evaluated and corrective action taken if one of the strategies is failing.
The choice of strategy and the acquisition of the necessary knowledge to carry it out are parallel tasks. For this purpose, books or websites such as this one can be read, the contents of which are completely free. You will find the stock market articles useful.
An initial difficulty is that in order to choose the strategy you have to have some knowledge, for which you have to read books and spend some time. But that initial lack of knowledge means that you cannot choose correctly which books to read and you may read several books that do not suit your needs, which will have been a waste of time and money.
If you don’t know which strategy to choose or which books to read, I recommend a strategy that I think is very suitable for most individual investors because of its combination of profitability and long-term security. It consists of building a solid portfolio of stocks with good future prospects that have a high dividend yield. And that, in addition, those profits and dividends grow over the long term above inflation. These companies are usually banks, utilities (electricity, gas, water distribution, telecommunication operators), highways, insurance companies and construction companies. They are not the only ones, but many of them belong to these sectors. All the contents of this website will be useful for you to develop this strategy or others.
The fundamental analysis is the one that tries to determine the value of companies based on their results and the assets (factories, brands, real estate, machinery, customer portfolio, etc.) that they have.
The technical analysis only looks at the graphs of the quotations. It does not pay any attention to the results and assets of the companies, only to the evolution of their quotation on the stock exchange. On many occasions, fundamental and technical analysis are placed on two opposite and irreconcilable sides. In my opinion, they are totally compatible.
A long-term investor should use fundamental analysis to say “what” companies to buy and technical analysis to decide “when” to buy them.
He should follow the results presented by the companies every quarter. You can use several sources to do this, such as the results section of this website, the companies’ own websites or newspapers. Use the one you find most comfortable and understand best. No matter how good a company is, it cannot be bought at any price. Pay close attention to the present dividend yield and to the prospects of that dividend increasing above inflation in the future. Most companies in the sectors listed above (banking, utilities, motorways, insurance and construction) meet these characteristics.
If you find a better strategy that you like best, do not hesitate to use it. But don’t start buying shares without knowing why you are doing it and what goals you intend to achieve with your investment. Every investor must find a strategy that suits his needs, his objectives and his way of being. The strategy should be tailored to the investor, not the investor to the strategy.