Have you seen “The Big Short”?
For those of you who haven’t, it’s a (GREAT!) movie about the 2008 financial crisis. And Steve Carell is AMAZING in it. Who knew he could do anything other than funny?
There are a lot of things to learn from that movie. But for beginner investors, the most relevant lesson is this: If you don’t understand finance well enough, it’s because someone doesn’t want you to understand finance well enough.
Let me repeat that. If you don’t understand finance well enough, it’s because certain establishments – banks, investment firms, big corporations, ETC – base a lot of their profit on you not understanding finance well enough.
Why do you think there’s so much use of Jargon, abbreviations, and fancy words to describe relatively simple concepts?
The good news is, a) I’m here to teach you some of the more important stuff, and b) The beauty of what the system I’ll be suggesting is that you really don’t have to know all that much.
More on that later.
So, now for the important stuff. Let’s cover some of the mere basics.
Big Word 1: “The Market”
“The Market”, according to Wikipedia, is “where people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand.
Securities include stocks and bonds, and commodities include precious metals or agricultural products.”
DO YOU SEE WHAT I’M TALKING ABOUT?!
So many big words, and this is just one paragraph in the world’s most objective and simplified source of information. Any wonder half of the world’s population is afraid to invest?
So, let me break it down for you. For our needs, “The Market” is where you put in a certain amount of money, with the intention of getting a certain return back – meaning, your money back, plus some more money on top of it.
Now, we could dive into all sorts of explanations about how the market works, but my belief is that 99.9% of investors don’t really care. All they want is to put money in, and get more money back. Any information that is not directly related to that is nice to know, but definitely not crucial.
So I’ll try give as little background information as possible, and focus on the things you care about. Agreed?
Great. So, now to the thing we most care about: how do you get a great return?
Generally speaking, there are a million ways to invest, and a million platforms to do it with. Picking what’s best for you depends on a few factors:
- What’s the return you’re aiming for?
Is it a solid %2 a year, or an aggressive 10%+? Obviously, we all want a Gazillion percent return with no risk, but that, much like me marrying Bar Refaeli, is not going to happen.
So, how do you find the magic number to start with?
Well, I could get into walking you through how to build an investor risk profile on your own. But then again, I like my readers better when they’re awake.
Therefore, in comes my first tool suggestion: eToro. eToro are great for beginner and intermediate investors,because they provide you with an account manager that walks you through finding that magic number. They’re also good for a number of other reasons, but more on that later.
This is the place to state that I have a partnership with eToro, and if you sign up with them, I get paid. This is also the place to say that they have over 4,000,000 investors, including a few dozens of happy clients I referred to them. So I’m pretty comfortable with shouting them out.
- How involved do you want to be?
Most investors prefer to set it and forget it, or just do minor tweaks every now and then. Others want to be more involved. To figure out what’ll work best for you, I suggest consulting with the guys at eToro (or any other platform you’ll choose) and find your ideal balance.
- How, and where, can you get the best ratio between low fees and high profits?
I will expand on this later on, but just remember this for now: when you invest, the return you see IS NOT money you’ll eventually have – because of fees.
Fees come in all shapes and forms: There are profit fees, activity fees (you pay every time someone buys or sells for you), management fees, and other small-print fees that even I don’t fully understand.
So, when it’s time to decide where and how to invest, always understand exactly how many commissions you’re expected to pay, what investment methods require the least human intervention, and what’s your profit bottom line, after commissions.
“Beating The Market”
In his fantastic book, “Money: Master The Game”, Tony Robbins says that 96% of all investment firms did not manage to “beat the market” over the course of 40 years.
“Beating the market” means this: There’s a relatively simple financial instrument called the S&P 500.
Investing in it requires almost no human intervention (meaning very little fees) and it will take you about 30 minutes in total to set up an initial investment.
The S&P500 is the “market benchmark”. In 2015, it made an annual return of 1.2%. Any investor that got a bigger return, “beat the market”.
However, remember the fees – If an investor made 2.5%, but had to pay a lot of fees, it is very likely that his bottom line was profit was lower.
That’s why when someone tells you they “beat the market”, always take it with a pinch of salt.
Big Word 2: “Financial Assets”, AKA “Financial Instruments”, “Financial Markets”, or a million different synonyms
Financial assets are, in essence, all the things you can buy or sell on the market for the purpose of making more money. Generallisticly speaking, there are four major asset categories:
- Stocks & Bonds
Stocks basically represent shares at a company. This means you could own parts of Facebook, Apple or Ikea, and profit whenever they perform well. Bonds are kind of like a loan you give out to a company – For example, you give them $100 today, and they promise to give you $200 back in 50 years.
Indices, such as the S&P 500 or the NASDAQ index, are basically groups of companies bundled together into “baskets”. In essence, the purpose of this instrument is to allow a less risky way of investing in stocks – because if one of the companies shows bad performance and its stock value drops, the others are there to balance it out.
Oil, Gold, Rice, and all that stuff. You buy this if, for example, there’s a tip that Russia is about to stop sending oil to the US due to political reasons, which could cause a rise in oil prices.
Dollars, Euros, Pesos and all that stuff. For example, a lot of people profited from trading on the Mexican Peso on US election day, because when Trump got elected the currency value crashed.
There are a few more instruments, such as CFDs, which I will discuss later. But for now, this is all you need to know.
Daaaamn. I don’t usually write this long, promise. But I think every person needs to at least know this before investing.