The Uncomplicated Guide to Investing | How People Actually Get Rich

You don't need to have a huge amount of money, consult a financial advisor, or read the 1,940,000,000 results of Google when typing "How to Invest".

Sure when you are new to this game, this investing thing can seem like a black box for old, rich, and entrepreneurs. I can assure you that it's not.

When you think you Invest

First, it is important to note that investing is not equivalent to purchasing a mobile phone, a laptop, or a TV.

Yes, you must have heard people saying "I want to invest in a good mobile phone!"

Well, when you "invest" on a mobile phone you instantly start losing money the moment you will leave the store. Your device will be worth less money the next month and will have probably been reduced to half of its original price the next year.

Investing is for when the value of money increases over time.

And I can assure you that when you finish reading this article, you will be one step away from investing properly.

Boring but Important. Inflation

So, what about leaving your money in the bank and save a little every month and grow your "wealth" that way?

Have you ever heard about inflation?

Inflation is that weird economic, complicated thing that eats your money away every year by an average of 2% depending on your country, so money loses its value over time.

That means that every year stuff costs about two percent more than it did the previous year.

For example, in 2000 in America, a coffee that costs $10 would cost $12.64 in 2020 provided that we purchase the exact same cup of coffee.

That's not a lot of money but what about $10,000? Well, your $10,000 is not going to be worth $10,000 any more because everything would have increased by 2% every year, $10,000 in 2000 would be equivalent to $12,637.58 in 2020 for the same purchase!

But, what about saving it in a savings bank account? A savings account will give you like 0.2% interest, which means your money goes up by 0.2% every year. But because inflation is up by 2%, you're still losing money over time.

Supposing we had a hypothetical savings account with an interest rate of two percent, it would roughly match the rate of inflation, so yes, we're technically not losing money over time.

Investing

And now the real investing comes in because the point here is that we don't just want to not lose money.

We actually want to make money.

If hypothetically, we could have a savings bank account that was giving us a 12% interest rate, which would never happen because that's just way too high, it means that every year we'd be making 12% of the value of the money in our savings account.

For example, if I were to add $100 to a savings account right now, the next year, it would be worth $112 and then the other year it will be $125 because there is an addition of 12% over the previous amount along with the previous 12%.

This is the power of compound interest.

You're never going to earn your way to financial freedom. The real route to riches is to set aside a portion of your money and invest it so that it compounds over many years. That's how you become wealthy while you sleep. That's how you make money your slave instead of being a slave to money. That's how you achieve true financial freedom.

Unshakeable by Tony Robbins

Sadly, these hypothetical 12 percent saving bank accounts don't really exist because the numbers are just way too high.

But! It could happen if we actually invest that money while not trying to find this super wow all in one savings bank account. The compound interest rule will be applied of course, and we will start gathering these lovely 12 percent every year.

"We are all born with different thinking abilities but we aren't born with decision-making skills."

Principles by Ray Dalio

Investing outside the Stock Market

Let's say you want to invest in real estate and buy or build a house for €200,000 in order to make money.

There are two ways you can make money from this investment.

Firstly, let's say you're charging rent to the people who are going to live in your house. Let's say you're charging them €1667 a month. That becomes €20,000 a year before taxes. And so, every year you are making €20,000 in rental income, which is 10% of what you originally paid for the house.

That means, in 10 years' time you'll have paid off the €200,000 we had put in because you're making 20,000 a year. But you haven't made a profit yet! You've just taken back the initial deposit that you've put in to buy or built that house. From now on, you start making money every year, you start making €20,000 before taxes.

Secondly, It's an investment because the value of the house itself would probably rise over time.

In general, in most developed countries in which house prices tend to rise over the long run, your house will probably be worth more than €200,000 in ten year's time. And in fact, in most EU countries and the US, historically, house prices are subject to significant positive price changes every 10 years.

So, you've started making money from the rental income, but you've also made money from the capital gains. Capital gains mean that an asset has had its value increased.

But the problem is that buying a house just so that you invest is a bit risky because you don't know if it's going to be rented, and you need money to make the investment. Actually, you need to have quite a large amount of money to built or buy the house according to the aforementioned example, and probably you will need a mortgage too.

And what if I told you that you have another option to invest without having a large amount of money to start with and don't need to put that much effort into managing the asset?

Investing in the Stock market

When you see on the news: "Elon Musk has become the wealthiest person on the planet, surpassing Amazon CEO Jeff Bezos" and so on and so forth, do you assume that he just sold more electric cars this year? It's all about stocks!

And now the Stock Market comes in, and It can give you that 10–12% for any amount you want to invest!

So, remember your $100 that we first mentioned? It will be $197.3 in 6 years, almost doubled! That's not a lot of money, but let's add that €200,000 to the stock market instead of that house. What will happen?

Well, in the first year your money will be worth €220,000 because of the fact that stock market returns on average are 10%. The next year this amount will be worth €242,000, the year after €266,200 and in 8 years it will be worth €428,717! You will double your money!

But real life is not so grateful these days, and we don't know anything about the next years because when you invest in the stock market and buy shares of a company, you actually own a small piece of that company which means when that company "loses" you will "lose" too.

So, you will not profit by 10% from your investments every year… This 10% is the average return each year every 10 years. So in the first year, for example, you will profit by 10% the next maybe 3%, the next -5%! But the next let's say 20%!

10-year stock market returns have averaged 9.2% over the past 140 years. And Between 2010 and 2020 was 13.6%!

Oh, wait! And what if you buy on the year that the stock market will return -10% and not 10%!?

That's why you shouldn't invest money that you will probably need in during at least the next 3 years, and you need to diversify (!) in order to lower the odds of buying on the top. If you check out how companies perform on market crashes, you will see that the decline is huge compared to a group of companies combined in an ETF, which we will talk about later. You must avoid investing in one sector, the technology sector, for example, which includes companies like Apple, Google, Amazon… but also in many different sectors as well, like health care, consumer staples, energy, and many more including real estate!

Yes, you can invest in real estate via the stock market with any amount of money you want! You don't have to buy the houses by yourself and the properties that you will rent. Instead, you can buy stock shares of a real estate company that already has such properties and is already making a profit from them.

As a result, you will get paid from these properties because, as we said earlier, when you buy shares of a company, you literally own a small piece of that company, so you have to get paid a portion of that company's earnings via a payment called dividend every month or every quarter, depending on the company.

Not all companies pay dividends, but in the real estate sector also known as REITS in the stock market, you will take dividends because the job of REITS is to collect those rents, and maybe reinvest an amount of that money to the company in order to buy more properties like hotels, offices, warehouses, medical facilities, retail centers. The rest is going to the shareholders as dividends which is a good steady income stream for investors.

In other words, you could even collect rents even with an investment of 100 euros!

A company decides to issue a dividend as a way of returning some of its profits back to the people who have invested in the company and therefore you make money through dividends.

The second way of making money from shares is the same as with houses, as you get the capital gains over time. We said that capital gains mean that an asset increases in value. And shares are assets.

In order to understand how you can make money from stock capital gains, I can tell you that if you had bought 10 shares of Tesla at the beginning of 2020 at $82/share, a total of $820, at the beginning of 2021 you now have $7000 because now, one share of Tesla is worth $700! This is about 753% profit!

Obviously, not all companies have such an extraordinary bust in a year, but I believe that I gave you a nice example regarding capital gains here!

How to Invest

Tell me that you didn't go to Apple.com/buy/shares or whatever and tried to find the "add to cart" button…

It's not that simple! Actually, to be honest, it's not a complicated thing nowadays. You must have an account on a stockbroker company, like Interactive Brokers to buy and sell shares.

Back in the day, a stockbroker was a physical person, whom you would call and say, "I want to place an order for some shares in Apple". And then your broker will make his magic tricks with his computer or place a paper order, and then you would own shares in Apple.

Thankfully, these days we don't have to talk to that broker because we can have a profile, a bit different than those we create on Facebook, to an online broker like InteractiveBrokers.com

Every different country has its own different brokers that operate in that country because, in order to be an online broker in a country, you have to abide by a hundredth of different laws.

But that doesn't mean that you can't have an account with a US broker if you are an EU citizen. I'm a European citizen and I have my profile with Interactive brokers because Interactive Brokers has operating offices in Europe too, but they have to follow the US laws and your profile too.

One of many laws, for example, is that you can't trade more than 3 times per week if you have under $25,000 in your account. And by trade, I mean buying and selling the same stock the same day. That's a day trade and that law helps prevent aggressive trading.

Other US brokers are TD Ameritrade and Fidelity. Some European brokers are Degiro and eToro that follow the European laws that are a bit more flexible…

Your next step is to see in which broker you want to open your account, after that, you have to fund your account with a wire transfer from your web banking account and buy shares. But as you might have noticed, companies have their own symbols in the stock market. TSLA stands for Tesla, AAPL stands for Apple, KO stands for Coca-Cola.

Steps in order to buy. You can avoid them if you don't want to buy in the near future.

Now you will see that you can choose for which price you want to buy it. Nevermind the fact that the KO is trading for $50 right now, that's because the stock market is an auction market, there is a bid and ask price. You can set an order to buy when the price falls to $47 for example, and sell it when reaches $55. But that's trading!

Trading means that you try to make money by speculating on prices, and we want to become investors here not traders! You have, of course, the option called "Market Order" which is an order to buy or sell a security (share) immediately without the need to set your desired price. This type of order guarantees that the order will be executed, but we don't know the price yet! Because with this order, you tell your broker that you are a rich person, and you don't need to buy it at a good, logical, fair price!

Well, don't be confused here because I have a simple, ideal, all-in-one solution that offers you simplicity and quickness, the "Limit Order".

If the KO share price is $50 you will set a "Limit Buy Order" a little above that. In this way, you essentially tell the broker for example "Hey, you can buy it for $51 but I don't give any more than that", so the broker will try to find someone who sells in between $50 and $51, not more! So you will not spend more than $51!

The same rule applies in case we want to sell. Let's say you already bought KO shares at an average price of $50.5/share, and I say average because you wanted to buy 10 shares between $50 and $51 and your broker found a seller that wanted to sell 2 stocks for $50.2, another one that sells 5 stocks for $50.7 and so on.

So you've got an average price that you've bought which is, for our example, $50.5.

At this moment the share price is $60, and you want to sell it. You can place a sell limit order at $59 and your broker will find the sellers for you because if we set it to $61 the broker will do nothing. He will just wait until and if the price rises to $61, and then he will sell it. The same applies in the case you want to buy.

Company Shares VS Index Funds

And now the big question: How the hell do I decide which shares to buy?

OK, to answer that, I should clarify that we can take 2 paths here, the active one and the passive one.

Active investing is when the investor buys and sells stocks by himself in an effort to "beat" the market, which means that he will try to bring better results in his stock portfolio than the average market.

Passive investing is when someone else does the job for you and you take your 10% return because this is the average of the market.

Active Investing

When is the right time to buy? Which stocks? Why these stocks? When is the time to sell them? How many stocks? What kind of stocks?

You have to answer these questions if you want to become an active investor and take more than 10% profit from your stocks per year.

It has to be hard to answer, right? Believe me, you can't be a good active investor even if you read all the investing bestseller books, all the investing articles out there, and even all of the 1,940,000,000 Google results of "How to Invest".

Because of the fact that you have to dedicate most of your day too, reading all the companies' balance sheets, spendings, profits, and debts to figure out if this is a good investment or not and if the company's share is at a fair price. Also, you have to be following business and economic news to protect your portfolio from bad news.

You must devote a lot of time frequently to review the future growth of your investments, the financial health of your businesses which is the Debt to Equity, the Financial Position, Analysis assets vs liabilities, the Return on Equity, earnings and revenue, and the stability and growth of your dividends.

That's a lot of work! And some people, despite all that, want to be active investors because they love big annual returns like Tesla, as we said before.

And in the end, the majority takes less than 10% which is the average return of a passive investor because they picked the wrong stocks, stocks that have poor performance over the overall market.

Passive Investing

So, the advice that most people would give for beginners is that you should not invest in individual stocks, you should invest in index funds.

And what the hell is an index fund? Well, you have, again, two options here: you can buy a Mutual Fund or an Index Fund.

Mutual Fund is a fund that is operated by professional money managers who decide which companies the fund is going to invest in. They take the investors' money, and they decide which stocks are the best for the fund, so let's say you invest all your money in one Mutual Fund that holds 10% of Apple, 8% of Amazon, 5% of Alphabet (Google) and so on. Your portfolio will also have 10% of Apple, 8% of Amazon, 5% of Alphabet, and so on. The key here is that they decide, not you!

Finally, we will see most people's favorite type of investing, Index Funds!

Have you ever seen on the news that the Dow or Nasdaq or the S&P 500 is down or up or hit a new all-time record?

These are Indexes, which means that they "gather" many stocks together and that they're telling us an average price, so it will be easy for us to understand what's going on with the market right now without having to check the performance of 50 or 100 stocks to understand today's returns.

Dow is the Dow Jones that tracks 30 large, publicly owned companies, and has the DJIA symbol.

S&P 500 or the Standard & Poor's 500 Index, is an index of 500 of the largest companies in the U.S., so by constantly watching this index, which has the SPX symbol, you know how these 500 perform now.

Nasdaq is an exchange like the New York exchange, and I'm telling you this now because I want you to know that we have indexes that track the stocks of a whole exchange, and also, and we can have indexes that track only the top stocks of an exchange.

Likewise, the Nasdaq-100 Index tracks the 100 biggest stocks that traded on the Nasdaq exchange and has the NDX symbol.

These are just indexes you can't buy or sell, that's where big investing companies like Vanguard, Black Rock, and Invesco come in. They created ETFs, Exchange-Traded Funds, in simple words, funds that also track the same stocks as the Index tracks!

So if you want to invest in the 100 biggest companies of the Nasdaq now, it is possible through buying not the NDX symbol, which is the symbol for the Index, but the QQQ which is the symbol for the Invesco ETF that tracks the Nasdaq 100. So simple!

We have hundreds of ETFs out there that track an index. ETFs, in a few simple words, are a group of stocks together so when you buy a share of an ETF, your money splits into many different stocks that this ETF includes, and automatically you diversify your money and portfolio.

Finally, investing all your money in an ETF that tracks the S&P 500 Index means that 6.5% of your money will go to Apple, 5.1% to Microsoft, 4.2% to Amazon, 2% to Facebook, 1.9% to Tesla, 3% to Alphabet, 1.4% to Berkshire Hathaway and so on. If you want to see the whole list, just search for "S&P 500 Companies by Weight".

Of course, if you think that a company will perform better than the market, and you are comfortable enough, you can invest 90% of your money in S&P 500 and 10% in that stock, in this way you are an active investor by just 10%.

There are many websites out there that will help you find the ETF that you like. You can also go to the investment funds website Vanguard, Black Rock, for example, to find the complete list of their ETFs and pick an ETF that invests in the U.S. and Europe, so you will be diversified across countries as well, not only by sector.

An ETF will give you capital gains and dividends. Many ETFs in Europe embed dividends to the performance, so you will not take dividends at all, but the performance of that ETF will be better.

Steps to help you find the best ETF for you depending on where you live. Avoid them if you don't want to find anything in the near future.

Be careful though, if you are a European citizen you can't invest in ETFs from the U.S., which means that if you want to invest in the S&P 500 you can buy an ETF that has a domicile in Europe, not the U.S.

Don't be confused, investment companies Vanguard, Black Rock have similar ETFs in Europe and the U.S. that track the same group of stocks. The only thing that is different is the symbol!

For example, a U.S. ETF that tracks the S&P 500 is IVV, created by Black Rock.

Black Rock has also created an ETF for European citizens to invest in the S&P 500 Index, the CSPX.

CSPX does the same job as IVV does, you will not pay with dollars but with pounds because it is traded in the London exchange and if you want to buy with the euro you can do that too!

You can go to the official website of the ETF, our example was Black Rock: "https://www.ishares.com/uk/individual/en/products/253743/ishares-sp-500-b-ucits-etf-acc-fund" you will see the performance over the years, you will see which companies were involved in the "Holdings" category and all the way down you will see the "Listings" category, and you will also see all the exchanges that this ETF is trading as well as the symbol or "Ticker" and of course the currency!

So if you want to invest in the S&P 500 from Europe with the Euro, you will go and buy SXR8, which is the same ETF but is trading on Deutsche Boerse Xetra, a German exchange.

Index funds have very low fees because they are not operated by a real person, as is the case with Mutual funds, with which operational managers decide what to invest in and do all this research in an effort to "beat" the market and get better results than the S&P 500 that makes 10% average a year.

Index funds are essentially a computer algorithm that automatically allocates the stocks within the Index and, as a result, the sectors are allocated accordingly as well.

That means that the S&P 500 in 1980 isn't the same as in 2020, IBM was the first and biggest stock in the S&P 500 that time, AT&T the second, Exxon the third, and so on.

Warren Buffett famously said that if you gave him one hundred thousand dollars and asked him to invest it right now, he would just invest in an index fund like the S&P 500. And, in 2008, Warren Buffett challenged the hedge fund industry to try and beat the market. He said that hedge funds are a bit pointless because they charge way too high fees, and they don't get the sort of returns they claim to get, and he ended up winning.

Bear Markets and Corrections

What if I lose all my money tomorrow!? What makes investing so hard? Because otherwise, we'd all be millionaires…

Our psychology!

That's the problem with the stock market, people get anxious and emotional when financial issues occur.

Let's talk about that now, the only way to really lose money in stocks is if you buy a stock at a certain price, and then you sell it for less than that price because you suddenly saw a bear market or a correction.

What the hell is a bear or a bull market, and what are corrections? All these terms are used to describe market conditions: a bull market is a market that is on the rise, a bear market when it is declining, and "correction" is just a small bear market.

Correction is when any market falls by at least 10% from its peak and a bear market is when it falls by at least 20% from its peak.

Remember that: the biggest danger isn't a correction or a bear market, it's being out of the market.

It's when you sell because you are afraid of losing more money, and in the end, when the market rebounds because it always rebounds, you miss that opportunity because you've already sold your stocks!

Bear markets, on average, happen nearly once every three to five years, and corrections every year! So accept corrections as your birthday!

The best thing you can do is literally nothing! I suggest here the rebalance method if you have bonds in your portfolio, but that's the job of another article to explain!

Over the long term, the stock market always goes up, and if you can control your emotions you will become a great investor.

Finally, include a column in your budget that says "investments", and invest money in your portfolio every month whether we have a bull or a bear market.

During bear market, the market, in simple words, is on a Black Friday! You must keep buying not selling.

In that way, you lower the average price of your investments. For example, if you have already bought an ETF at €50 at peak and prices have started to go down, you must keep buying every month as your budget says and don't stop.

So when the price fell to, let say €20, you will have already bought when it was €40 and then €30 and then €20 so your average buying price will be no longer €50 but €30, and when the prices will start to rebound because they always rebound, you will start making profits from €30, not from €50!

Take a look at what happened after the biggest stock market crash.

This is how the S&P 500 performed right after the rock bottom of the crash until the next correction or bear market.

Warren Buffett said that he likes to be greedy when others are fearful, now you know why.

Every bear market in U.S. history has always swapped to a bull market!

In conclusion, what would have happened if you got scared and sold your stocks during a crash? You would have lost the opportunity to take back all your losses and make a profit too!

Investing VS Trading

Investing is when you buy and hold for years or forever.

Trading is when you're gambling, you buy and expect the prices to go up in order to sell, even on the same day, and make a profit.

You should always be thinking, "how can I mitigate risk while maximizing potential returns?"

But by buying cryptocurrencies or other currencies you turn yourself into a trader, therefore you maximize risk.

You're speculating, you can't predict what will happen so you buy because some news or friend told you that would be a good idea.

In this case, you are influenced by the news, you make them your investment friend. Can I add, again, a bit of history here? I quote some predictions from one of the best investing books out there: Unshakeable by Tony Robbins regarding the news, and I commented on them. See for yourself if it would be a good idea to follow them.

So if you don't know what will happen to currencies, cryptocurrencies, and penny stocks why do you want to trade or invest in these and not on the stock market with such a spectacular history over the years?

At this point, I want to add to this article the following picture, which you can also find on social media, and I wished to include it because it's powerful.

It happens in every case, whether it is crypto or penny stocks.

It's a quick reminder to not let the fear of missing out dictate your decisions.

To conclude with trading, I will write down for you only one small paragraph, of another great book for investing out there…

Why do you suppose the brokers on the floor of the New York Stock Exchange, always cheer at the sound of the closing bell-no matter what the market did that day? Because whenever you trade, they make money-whether you did or not. By speculating instead of investing, you lower your own odds of building wealth and raise someone else's.

The Intelligent Investor by Benjamin Graham

Resources

To use the symbols we had mentioned you need a chart software, and a good one is Trading View. You can check, save, and make your own lists of Stocks, Bonds, ETFs, Forex, and Crypto charts.

tradingview.com

Maybe the best "Wikipedia" for the stock market out there.

investopedia.com

A good "how-to" website for business and budgeting stuff.

thebalance.com

To help Active investors, provide well structured, valuable information for businesses.

simplywall.st

Helps you know what time the stock markets are open.

market24hclock.com

Test how your portfolio will perform over the years with this site. Go to portfolio backtest, and create portfolios compare to the overall market.

portfoliovisualizer.com

Stock market resources articles with great illustrations.

visualcapitalist.com

I want to thank you all, wish you good luck with your investments, and as for your investment knowledge,

I will be here for you, whatever you want to ask!

Feel free to make me your investment buddy and contact me on social media.

drachas.com