Index
I asked my Instagram followers which words they associate with investing. “Opportunity” and “long-term” came out on top, followed by “complex” and “fear”.
For those who don’t invest, these are the top reasons:
This blog is to give you the confidence to start investing, explain some basic principles, and show you where to start.
Let’s debunk a few myths about investing:
Do I need to be a financial expert to invest?
A follower asked me, “Is it safe to invest my own money or should I use a financial advisor?”
Investing your own money without being a financial expert is safe and possible. Of course, you should not pick single stocks or put all your money into a single fund, but long-term diversified passive investing is completely doable by yourself.
Is there a lot of luck involved?
If you’re stock picking (selecting single companies stocks to invest in), yes - there is luck involved. But you don’t have to (and in my opinion, should not) select single companies to invest in. You can get diversified access to multiple companies by investing in Index Tracker ETFs which tracks the overall market (multiple countries, companies, and industries). The aim here is not to get rich quickly but rather to build wealth over the long term.
How do I know when the right time is to invest?
No one can tell you when the “right” time is to invest. There is a very well-known saying that TIME IN the market is better than TIMING the market. Investment professionals spending full days analyzing the markets are not able to predict a good time to invest. You should invest as often and as early as possible.
Is investing only for the wealthy?
Definitely not. I am a strong believer in building wealth for yourself regardless of your salary, education, and/or family situation. Starting with as little as $10 or R200 a month is enough. I would suggest you aim to invest at least 10% of your income every month - but for someone getting started this might be daunting. I aim to invest 20% of my income every month.
Is investing only for those with big risk appetites?
Absolutely not. You can invest in fixed deposits or bonds which are low-risk (more on this below). Although earning higher returns is associated with higher risks. It can be done responsibly in a well-diversified way which means you can lower your overall risk and still earn returns. It’s important to understand that all investments come with risk, but if you want to avoid all risk you would need to hold your money in cash - which is not smart because over time your cash will lose its real value due to inflation and currency devaluation for those holding South African Rand.
Now let’s look at three principles to understand when investing in the stock market.
First principle: The stock market
There are millions of companies all over the world, like the hair salon you visit or your favourite clothing store. When a company reaches a certain size, considered together with other motivating factors, its owner(s) can choose to make it a publicly listed company. This means instead of it being privately owned, like the hair salon, the public can invest in the company on “the stock market”.
The two main components of the stock market are bonds and equities. Bonds act similar to loans which have interest rates and maturity dates when the loan will be repaid. Imagine investing in a loan, you will have certainty about the interest you’ll receive which is agreed beforehand and the capital will be repaid by a predetermined date. Because of the certainty around the interest you’ll earn and the fact that you expect to receive your capital back at maturity, bonds are mostly considered low-risk investments (yes, there are exceptions, but we’re keeping it simple here). Since bonds have low risk, the return you expect to earn is low.
Equities, on the other hand, are when you own a portion of a company. Also commonly referred to as stocks and shares. When owning a portion of a company the value of your shares will grow (or shrink) with the company over time. The company can also pay dividends when they have profits they want to distribute. But with owning equity comes uncertainty. Uncertainty around whether the company will grow, by how much, and if it will be profitable. This is why investing in equities carries more risk.
In principle, the main difference is bonds have lower risk with lower returns and equity has higher returns with higher risk.
Second principle: Passive investing and index funds
Passive investing means investing in funds that track (move along with) an index. Instead of actively selecting companies to invest in, the index fund you select will track an entire market. For example, the S&P500 is an index that tracks the stocks of the 500 largest companies in the US. By investing in a fund that mimics the S&P500, you get exposure to all 500 companies instead of individually selecting which companies you want to invest in.
This strategy is hands-off and low-cost, as it doesn't require constant monitoring or expensive professional management.
Over time, the idea is that the overall growth of the market will increase the value of your investment. It's like setting up a little robot to follow the market for you, providing a simple way to grow your money without the stress and cost of actively managing your investments. See my blog on 9 things to know about Index Tracker ETFs to learn more.
Third principle: Your risk tolerance and timeline
Personally, I have a high-risk tolerance because my time horizon for my investments is very long - I plan to access my investment in more than 30 years at retirement age, potentially only thereafter if I have other sources of income at the time. Therefore, if the stock market goes down by 20% next year, I can wait for it to recover (more on this below).
Your risk tolerance and timeline will determine how much of your investments you allocate to lower risk (bonds) and higher risk (stocks) - see the first principle. For example, a high risk-tolerant 20-year-old could choose to allocate 100% of their investments to stocks. A medium risk-tolerant 40-year-old could prefer a 60:40 split (60% stocks and 40% bonds).
Here is a chart showing the returns on different bond and stock ratios over 89 years and also the maximum historical loss each ratio has experienced.
(For South African readers, keep in mind these returns are in USD - read my blog “Currency Smart” to understand why this matters. As a rough rule of thumb, add 6% to the annualized return to compare it to your Rand returns.)
Interpreting this chart you could say, “A 100% Stock portfolio (0 bonds) has the highest returns historically (10.1% per year) so that’s what I will pick”. Yes, you could - but accept that it could potentially result in a “down” year losing you 43.1%. Don’t let this scare you off yet, there’s more on losses and crashes below.
I prefer a 100% stock portfolio considering my age (32), but there are arguments against a 100% stock portfolio - read this article to learn more. Another consideration that is unique to my circumstances is that I have a pension fund account in Switzerland which is invested very conservatively and I view this as the “bond”/low-risk portion of my investment portfolio.
It’s important to note the bond and stock split you choose is not set in stone, it can change, and should be changed as your risk tolerance, needs, and age changes.
Now that you understand these three principles, let’s set you up for success.
Are you ready to get started?
Now, the 4 steps to get started with investing:
Choose your portfolio split
Open a broker account or select a service provider
Decide how much you’ll invest every month
Select the Index funds
Step 1: Choose your stock and bond split
Based on the third principle above, select your split according to your risk tolerance and timeline.
Here is another article that discusses bond and stock splits. It’s important to know there is no “right” or “wrong” answer. You need to be comfortable with the risk you’re taking on and willing to commit to investing for the long term.
Step 2: Open a broker account or select a service provider
You can invest through a bank, robo-advisor, or do it yourself through a broker. In choosing a provider to invest with, my biggest questions are cost and security. Typically, banks are very expensive to invest with. The rise of online brokers has made investing low-cost and accessible for retail investors but it is more time-consuming and there is a margin for error for personal decisions. In the long run, it can save a lot of fees to do it yourself.
I prefer investing by myself through a broker. Here are some brokers you could use, I will publish a review of brokers in due time, but my suggestion now would be to do your own research. These are the ones I have used personally or seen friends use, but there are many more options out there:
Europe & US: Swissquote, Interactive Brokers
South Africa: EasyEquities, Interactive Brokers
Here is a quick table to compare the fees1, this is simply to give you a benchmark and idea of what to look out for when selecting a broker:
Personally, I use Interactive Brokers, here is a referral code you could use if you’re interested. Their fees are some of the lowest out there, but the interface is complex - it might overwhelm a newcomer. Therefore, look around to find a provider you are comfortable with.
Something else to consider with a broker is security (for example, Interactive Brokers is regulated by the US Securities and Exchange Commission) and where your account is domiciled (a fancy way of referring to the country where your account is “hosted” by the broker).
When I polled my South African followers, 86% showed an interest in offshoring their investments out of South Africa. There are two things to think of here: Getting exposure to foreign assets and the “physical location” of your investments. You can get exposure to foreign assets, for example by investing in a US Index Fund, but your investment account will still be domiciled in South Africa. By investing through Interactive Brokers (as example), your investments will be offshored outside of South Africa. There are limits on how much the South African Reserve Bank allows you to take out of SA annually (R11mil). This topic is worth its own blog. Subscribe to be notified when I publish this.
Then, you could also use other service providers, such as your bank or asset manager. For example Selma (EU), UBS (EU), Sygnia (SA) or NinetyOne (SA). Always be very aware of the fees.
For example, a Sygnia Itrix S&P 500 ETF, one of the lowest cost options in South Africa, has an expense ratio of 0.20% compared to Vanguard’s S&P500 ETF (available on EasyEquities and Interactive Brokers) which has an expense ratio of 0.03%. Both track the same index and therefore have the same expected returns. If you invest in Sygnia’s ETF rather than Vanguard’s - this could result in a loss of $18’000 due to fees when investing $500 per month over 30 years at an assumed 7% annual return - don’t let the small % fool you. I’m getting carried away on fees. Separate blog due on this.
I have created a resource available to paid subscribers to help them compare fees of different ETFs and brokers, access the blog here.
Using a broker could incur additional fees on commission, therefore selecting a low-cost broker is important. Keep in mind the broker commission is once-off, where the fees on ETF’s recur annually.
Step 3: Select the index funds
To understand what Index tracker ETFs are, read my blog on 9 things to know about index tracker ETFs.
There are three things to consider when selecting index funds:
The market covered
The fees
The type of investment (stocks or bonds)
To be well-diversified it’s good to select an index or combination of indices that give exposure to companies globally. The United States makes up around 50% of global capital markets, therefore inevitably with a global approach you will have a lot of exposure to the US. This, in my opinion, is not a bad thing - many companies in the US have global revenue streams (think Apple, Microsoft, Nvidia) but of course, you remain exposed to any US Dollar fluctuations and/or other turmoil in the US, for example political turmoil. Because of the significance of the US market, many indices classifications specify that they are US or non-US.
Here are some of the largest Index ETF’s in the world, their size, what they track, and their fees (link to individual webpages in footnotes2):
Tracking error and liquidity should also be considered, but when choosing from the largest ETFs globally, you will be safe on this front.
Step 4: Decide how much to invest
If this is your first time investing, you might not have confidence yet. It’s ok to start small.
If you already have cash saved up, you can invest a part of that. My recommendation is to invest at least 10% of your income every month once you have established an emergency fund and paid off high-cost debt (such as credit card debt).
I would also suggest you maximise your tax-friendy investing options (TFSA in South Africa, Pillar 3a in Switzerland, ISA in UK, etc. Most countries have a tax-free growth or tax-deductible investing option. In South Africa, I am not a big fan of Retirement Annuity investments because of restrictions on how much can be invested in foreign assets. In Switzerland, I am not a big fan of additional Pillar 2 buy-ins especially for young professionals because of the very conservative risk and returns.
Step 5: Commit for the long term
Realize it’s a long-term game. These investments should not be seen as money you can use in the next year. Although ETF investments are accessible and can be liquidated easily. Returns will only compound and pay off, on average, in the long term.
There will be some negative years in your investing journey. And you will need to wait until it recovers. Selling in a downturn is the worst thing you can do.
To illustrate this, let’s look at the 4th largest ETF in the world (Vanguard Total Stock Market Index Fund) which was created in 2001, it’s size is $367 Billion and it offers exposure to more than 3’000 companies in the US. The fund has returned more than 300% since inception. Look at the below chart of the ETF’s performance - how many ups and downs there are - it’s important not to lose sight of the long-term trend.
Can I lose all my money?
Theoretically, if you are invested in a well-diversified global portfolio and in a very worst-case scenario - like if there is a global war or another pandemic - your investments will lose a lot of value. But if we look at the worst stock market crashes in history, and even if you were exposed to all of those (if you could have lived that long), this is what the S&P500 Index did:
If you were as “unlucky” as to invest at the high just before one of the most significant crashes in recent history, the Global Finance Crisis in 2008, your investments would have lost 40% of their value within a year. But it would have recovered. If you had held on to the investment for 16 years until 2023 you would have gained 340% at an average of 21.36% per year.
I hope these principles and steps provide you with the necessary knowledge and confidence to start investing. As always, I’d be very happy to get your feedback. You can reach me on Instagram (@moneywithcarla) or email: info@moneywithcarla.com
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Disclaimer: This is not personalized financial advice but rather for educational purposes. I have made every effort to ensure accuracy but it cannot be guaranteed. Do your own research before making investment decisions.
https://www.interactivebrokers.com/en/pricing/commissions-stocks.php
https://www.easyequities.co.za/pricing
https://www.swissquote.com/en-ch/private/trade/pricing/account-fees
Size as per: https://etfdb.com/compare/market-cap/
Vanguard Total World Stock ETF: https://investor.vanguard.com/investment-products/etfs/profile/vt#overview
iShares Core S&P 500 ETF: https://www.ishares.com/us/products/239726/ishares-core-sp-500-etf
Vanguard FTSE All-World ex-US Index Fund: https://investor.vanguard.com/investment-products/etfs/profile/veu#overview
Vanguard Total Stock Market ETF: https://investor.vanguard.com/investment-products/etfs/profile/vti
Vanguard Total Bond Market ETF: https://etfdb.com/etf/BNDhttps://investor.vanguard.com/investment-products/etfs/profile/bnd#undefined
iShares Core U.S. Aggregate Bond ETF: https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf
Vanguard Total International Bond ETF: https://investor.vanguard.com/investment-products/etfs/profile/bndx
Would you say that an ETF is the way to go to "save" for my daughter's studies? Let's say 15 years. Will the return be sufficient over a 15 year period?