13.3 C
Brussel
vrijdag 2 juni 2023

The Ultimate Guide to Getting Started with Investing

OK, you’ve decided. You want to start investing.

But how do you handle that? Where should you start? How can you get off to a good start?

You have a thousand questions but no answers. Don’t worry, this is normal!

Like you, I knew absolutely nothing about the stock market. I spent hours reading books, scouring the internet, watching videos on YouTube, reading blogs and visiting forums. Everywhere I found pieces of information that helped me to put together my own investment portfolio and to start investing myself.

In this ultimate starter guide I have centralized all those puzzle pieces of information. In this way I will help you in the interesting (and often very profitable) world of the stock market and investing.

Are you ready for it? Let’s ring the bell!

Introduction

Everyone has heard of investing in the stock market. Perhaps you have already heard of people who have lost a lot of money by investing it? Or from someone who has become wealthy with it?

In either case, it will probably not be a wise investment, but rather a speculative investment that is very similar to gambling in a casino.

In the coming chapters I will take you into the world of the stock market and investing. To help you make wise investments, I’m going to start with the basics of the economic machine.

There are people who devote their entire lives to studying economics. It is therefore not easy to get the basics fully explained in a few paragraphs.

Fortunately, I found a video that beautifully explains the most important elements with enough depth. This video takes half an hour and after watching it you will be much wiser about how the economic machine works!

You can also skip this video, but I recommend watching it. This way you will also understand the other concepts more easily because you have a solid theoretical basis.

Enjoy watching!

Source: YouTube

And what did you think of it? Have any lights come on yet? Okay then let’s move on!

What is the stock market?

The stockmarket. That mythical place where stories of instant wealth and poverty are born. Yes it’s true, it’s a place where many dreams come true but even more dreams are shattered. But if you want to start investing, you have to go there!

What does Wikipedia say?

A stock exchange is an organization that makes it possible to trade securities such as stocks and bonds.

Wikipedia

The stock market is therefore not only a physical place, but also an organization.

In Europe, the stock exchanges are held by the following organisations:

  • Euronext (Belgium, France, Ireland, Netherlands and Portugal)
  • London Stock Exchange Group (United Kingdom and Italy)
  • Deutsche Börse (Germany also known as XETRA)
  • SIX Swiss Exchange (Switzerland)
  • Nasdaq Nordic (all stock exchanges from Scandinavia and Eastern Europe)
foto van de beurs van brussel
The stock exchange of Brussels
Source Wikipedia

In America, all exchanges (except the IEX) are owned by the following organizations:

  • Intercontinental Exchange
  • Nasdaq Inc.
  • Cboe Global Markets

On the stock exchanges, which are managed by these organizations, you can therefore trade the securities listed on them.

On Euronext Brussels, for example, you can often trade Belgian shares such as AB Inbev, Ageas or Bekaert, while on Euronext Amsterdam you can mainly buy and sell Dutch shares. But there are also securities that are listed on different stock exchanges. For example, you could buy Royal Dutch Shell shares on the Amsterdam stock exchange, but also on the London stock exchange.

In addition to shares, many other securities are traded on these exchanges, such as bonds, ETFs (Exchange Traded Funds) and derivatives (options, futures, etc.).

It is also on these exchanges that the rates or prices of the securities are determined. The price of a security is not determined by anything other than supply and demand. The factors influencing supply and demand are, of course, somewhat more extensive.

To better understand the concept of the stock market and the way in which the price of a security is determined, watch this video:

Source: YouTube

Okay, so now we know what the stock market is and what happens on that stock market. Now we’re ready to move on to the next section! Another step closer to starting investing!

What is investing?

According to Wikipedia, investing is:

An investment is a form of investment in which money is committed for a longer or shorter period of time with the aim of achieving financial benefits in the future. Investing offers capital in exchange for uncertain income in the future.

Wikipedia

So it is investing your money with the expectation that it will be worth more when you get it back.

Invest or speculate?

Those stories you’ve heard or read about people getting rich quick or just poor on the stock market?

Forget it!

That has nothing to do with investing or investing. This is called speculating and is more like going to the casino.

The big difference between investing and speculating is the risk you run. The more risk you run (and the higher your potential return or loss), the more likely you are speculating instead of investing.

grafiek waarop iemand een grote winst heeft behaald
Profit is nice
grafiek waarop iemand een groot verlies heeft geleden
But a loss can be painfull

Options, for example, can be a risky instrument to gamble on the on the price of shares. Investing is a completely different discipline and has little to do with speculating. In order to achieve decent results on the stock market, it is therefore not recommended to speculate.

Different types of investments

In addition to the usual investments via the stock exchange, there are many other types of investments. You can start investing in endless things. Whether it concerns buying and renting out real estate, buying shares or bonds on the stock exchange, buying gold at the jeweller’s, building a wine cellar or restoring or collecting old timers. There are 1001 ways to invest.

There are people who choose their own niche and then specialize in it, such as real estate. Or you have others who put together their own stock portfolio after they have thoroughly studied each company. The possibilities are endless and it is up to the investor himself to determine what his strategy will be.

Risks

But investing wouldn’t be investing if it didn’t involve risk. We have already talked about speculating above, but there are also risks associated with investing.

The risks do of course depend on the type of product, for example with individual shares, one of the risks is that you will lose your entire investment if the company in which you put your money goes bankrupt. Not fun but no risk, no reward…

The biggest risk in investing is not getting back as much for your investment as what you paid for it.

Why do I need to invest?

The key question is of course: Why should I start investing?

There are several reasons why you can choose to start investing.

The two main ones are:

  • Inflation
  • Profits

Inflation

What is inflation?

Inflation is: the increase in the price of goods and services.

Or according to Wikipedia:

Inflation (literally ’to inflate’) or depreciation is an increase in the general level of prices in an economy .

Wikipedia

Check out this video for a clear explanation of the concept of inflation:

Source: YouTube

Last year, inflation was around 2% in Belgium, while the maximum interest rate on a savings account was around 1%. Your savings that were in (the highest-yielding) savings account have therefore become worth 1% less.

In other words, your savings lose purchasing power.

In the short term this is not so noticeable, but you will notice it over periods of 10 to 20 years. That is why it is recommended to start investing so that you can maintain your purchasing power and do not gradually become poorer.

grafiek waarop je de evolutie ziet van de waarde van 1 euro sinds 1968
Evolution of the value of 1 euro since 1968.
1 euro in 1968 is now only worth 0.20 euro.
Source: De Tijd

Profit

In addition, there is of course also the fact that there is some extra money to be made. Who wouldn’t like some extra money?

The long-term return of the 500 largest US companies is 10% before inflation. That is already a nice return!

Suppose you were to invest 10,000 euros today for 40 years. How much would we end up with if we assume that over the entire period we generate a return of 10% per annum?

afbeelding van een online calculator waarmee een berekening is uitgevoerd

10 000 euros (or dollars) adds up to almost half a million! Isn’t that worth it or not?!

Clicking on the link below will open a pop-up that will allow you to play around with the calculator I used above:

Moneychimp Calculator


Of course there are many more reasons to start investing. For example, you can also start investing for your children or grandchildren so that they can make a good start later on.

Nice! You are already well on your way in this starter guide! Just a little while and you will have mastered the most important things so that you can also start investing!

In the meantime you already understand how the economy works and what the stock market is. In addition, you now also know what investing actually is and why you should start investing. To complete this part, I recommend watching the video below. In this video, celebrity investor William Ackman explains what you need to know about finance and investing in just under an hour.

Enjoy!

Source: YouTube

How should you invest?

Okay, we are convinced that we should start investing, but then the question naturally arises:

What is the best way to invest?

Personal Risk Profile

Everyone has a different goal and different expectations. In order to work out a plan of action for you personally, you must first determine your risk profile.

Your risk profile is actually determining for yourself how much risk you can, want and must run.

Someone in their twenties who invests for retirement, for example, still has a long time before he needs his money. So this person can take more risk than someone who is somewhere in their fifties.

In general you can say that:

The further away the date is that you need your investments compared to when you will start investing, the more risk you can take.

Of course this depends entirely from person to person.

Some people can handle it if they see their money fall in value by 50% in the short term, others can’t. It is therefore important to take a good look in the mirror before deciding how much risk you want to take. A good rule of thumb is:

If the price movements of the securities in your portfolio make you feel mentally unsettled, you are taking too much risk.

Your risk profile is therefore determined by a combination of emotional and psychological factors, as well as the duration of your investments.

If you are unsure about your own risk profile, you can take a Vanguard test online to determine your risk profile and tolerance.

Money that you need in the short to medium term is not suitable to start investing with.

Risk and return

Now that you have been able to determine for yourself what your risk profile is, we can also determine this for your portfolio!

A good investment portfolio generally consists of 2 parts: 1 part for growth and 1 part for stability.

For the growth part one uses: shares
For the stable part one uses: bonds and cash

If it’s all very new to you, I suggest you watch the videos below to learn what stocks and bonds are:

What are stocks?

Source: YouTube

What is a bond?

source: YouTube

Before you can start investing, you must determine your asset allocation, the division between the stable part and the growth part. This is a very important choice and has a direct impact on your return. The risk you take and the return you receive are very closely related. It is generally accepted that:

The more risk you take, the greater your chance of a potential return

But also:

The more risk you take, the greater a possible fall in your portfolio can be

bron: YouTube

To help you choose, I’ve broken down the asset allocations below (growth/stable) and ranked them by risk.

The higher in the list, the greater the risk:

Very dynamic: 90 / 10
Dynamic: 75 / 25
Light dynamic: 60 / 40
Balanced: 50 / 50
Mild Defensive: 40 / 60
Defensive: 25/75
Very defensive: 10 / 90

tabel met max drawdowns van verschillende asset allocatie

In the table above you can see the division between growth and stability on the far left. in the middle you have the long-term canned return of this distribution.

On the far right you see the maximum historical loss you would have had with the corresponding distribution.

So you can clearly see that risk-free investing does not exist.

How do you choose an asset allocation?

There are a number of ways in which you can make a good choice about your distribution:

Age in stable assets: It doesn’t get any simpler, just your age is the percentage of stable assets in your portfolio, this is a widely adopted strategy that works well for many investors. Some find this rule of thumb too defensive.

Age-10 in stable assets: A more aggressive approach to the above strategy.

Benjamin Graham strategy: This strategy comes from the book “The Intelligent Investor” by the well-known mentor of Warren Buffett namely Benjamin Graham. He states that the portfolio of the intelligent investor should never contain more than 75 percent equities and never less than 25 percent and vice versa for bonds.

Benjamin Graham does not recommend a static asset allocation, but rather a well-considered choice based on market conditions. Suppose the sentiment is exaggerated and the stock markets are heavily overvalued, then he recommends holding more bonds than equities. If there is a crash, the investor can switch from a low equity percentage to a high equity percentage and thus the understanding of ” buy low, sell high” to maximize returns. If the investor cannot make a well-considered choice about the state of the stock market, a 50/50 split between shares and bonds is recommended. It sounds simple, but if you can put it into practice, this is a winning strategy.

Use of a glide path: Using a glide path means that the investor will adjust his asset allocation as he approaches his target. You basically “slide” from a more aggressive distribution to a more defensive one based on your age. As in the example, a young investor can take more risk than someone approaching retirement age. The stock/bond ratio therefore changes over time. This is also similar to the age in bonds rule and is used by, for example, Vanguard with their Target Date Funds.

afbeelding waarop het glide path dat Vanguard gebruikt voor zijn target date fondsen grafisch wordt voorgesteld
Hier zie je een glide path dat gebruikt wordt door Vanguard.
bron: Vanguard

If you have also made your choice about this, we can move on to effectively distributing your money over the various asset classes. Also called asset allocation (or asset allocation).

What is asset allocation?

Asset allocation is the division of your wealth over different asset classes and one of the most important choices you can make when you start investing.

There are different types of asset classes:

  • Stocks
  • Bonds
  • Cash
  • Property
  • Commodities
  • Alternative investments

Each asset class is a group of securities that have similar properties and behave the same on the stock market.

Each asset class has its own risk-return ratio. For example, equities and real estate carry the highest risk but also have the potential to deliver the highest returns.

Bonds and cash instruments (savings accounts and time deposit accounts) have a much lower risk and also do not have the potential to provide the same returns as stocks and real estate.

Many investors use complicated models to give each asset class the perfect weight within the investment portfolio. But I have good news for you…

That is not necessary at all!

Since a good portfolio consists of a part for growth and a part for stability, we can easily build our portfolio with stocks for growth and bonds for stability.

Stocks, bonds, funds and ETF’s

So we have decided that we will only include stocks and bonds in the investment portfolio. The question now arises which products we will use for this.

We can use 3 products to gain exposure to stocks in our portfolio:

  • Individual shares
  • Funds
  • ETFs (Exchange Traded Funds)

Individual stocks: Everyone knows this product. They are simply the shares of a company that you can buy on the stock exchange. With 1 share you basically buy a part of the company. An individual stock is the riskiest of the three products. This is because you have very little spread, all your money is only in 1 company. If this company goes bankrupt, you lose everything. On the other hand, with an individual share you also have the best chance of a higher than average return. Of course you have to choose the right share. Very few people consistently pick the right stocks. This makes an investment in an individual stock even riskier.

Not good!

Equity Funds: A fund is managed by a professional fund manager who decides which stocks are part of the fund and which are not. So they are products that give you exposure to multiple stocks. The risk that you will never see your money again is therefore much smaller than with an individual share. After all, all shares in the fund should go bankrupt.

“Okay a fund sounds good, are we going to use that?”

No!

Because a fund is managed by a fund manager, the fund manager’s stock choices may not turn out to be very successful in retrospect. Suppose the return achieved by the fund manager is much lower than that of the general stock market, then yes, it has not done its job properly!

Statistics show that very many fund managers do not outperform the benchmark. For example, in 2019, 71% of all European equity funds underperformed their relevant benchmark.

grafiek met data van de SPIVA waarop staat hoeveel procent van de fondsbeheerders beter of slechter doen als de index
Bron: SPIVA

In addition, most funds are also quite expensive in terms of costs. Ongoing costs (the amount you pay per year to the fund manager, also called TER) range from 0 to 2.5% per year and more!

Funds are therefore expensive investment vehicles where there is a good chance that you will not achieve the same return as the benchmark.

Why would you pay a fund manager for this?

Fortunately, we can also invest in the benchmark itself.

ETFs: Investing your money in an ETF is investing in an index. An index is a basket of different securities (shares or bonds), so you spread your money over all the securities that belong to the index. So you buy the index, as it were. An ETF therefore also has the advantage of being spread over several securities (sometimes thousands). There is therefore simply no risk of bankruptcy. In addition, ETFs are often very cheap. The most common ETFs here in Belgium have an ongoing charge between 0 and 0.20%.

In addition, there is a disadvantage to ETFs, which is also an advantage: because you invest in an index, you will never outperform the index! So you will never be able to get more returns than the stock market.

afbeelding waarop het verschil tussen een aandeel, ETF en een fonds staat

In other words: you will never be able to become the next Warren Buffett! But you do invest in the way that he personally recommends!

Read this article from Business Insider about why Warren Buffett recommends index investing: Warren Buffett thinks index funds are the best way for everyday investors to grow their money

The advantage is that you will outperform most professional fund managers as shown above!

In this guide, I’m going to start investing using ETFs. In my opinion, they are the ultimate product for the small investor to achieve superior results on the stock market. So we are going to do ETF investing, also known as index investing.

What is index investing?

You may have already heard of ETF investing or rather index investing. Many investors use the terms index investing and ETF investing interchangeably. An ETF is the product with which you can invest in a certain index. And so ETF investing is another term for index investing.

But this is only true in Europe because in the US there are many index funds. As a result, they use fewer ETFs and the common name there is “index investing”.

In Belgium, a local index is, for example, the Bel20. This index is a basket of up to 20 Belgian stocks ranked according to their free market capitalization.

But there are countless other indices, the index provider Dow Jones, for example, has 130,000.

The first model for an index fund dates back to 1960. Two students from the University of Chicago came up with the idea of an unmanaged investment vehicle. At the time there was little support for their idea, but it led to the creation of the first index fund in the following decades.

The most well-known index fund provider is probably The Vanguard Group. This company was founded by John Bogle in 1974 and he is sometimes referred to as the father of index investing. On December 31, 1975, he started his first index fund called “First Index Investment Trust” which would later be known as the “Vanguard 500 Index Fund” which is based on the S&P500.

At first, opponents were skeptical, why should investors be satisfied with average returns? But as more and more studies emerged indicating that the vast majority of actively managed funds fail to beat their benchmarks, index investing became increasingly popular.

Currently, index funds have about 29% market share of the US market.

Index investing is based on the “Efficient Market Hypothesis”. This theory assumes that it is impossible to outperform the market because the financial market is efficient at determining the price of a security. The EMH assumes that all known information about a stock is already factored into the price, making it impossible to beat the market through stock picking or market timing. The only way the investor can achieve any higher returns is by: investing in riskier securities, simply by luck or by having inside information.

Although it is the basis of “modern portfolio theory”, there are many opponents. Warren Buffett, for example, has outperformed the market over a long period of time, which is theoretically impossible in the EMH. So not everyone is convinced.

Constructing an investment porfolio

Meanwhile, we have come to the fun part of starting to invest, which is building your portfolio!

Because we will be investing according to the principles of index investing as prescribed by Jack Bogle and the Bogleheads, our portfolio must meet a few conditions:

  • Cheap
  • Globally diversified
  • Simplicity

In addition, they must be physically replicating ETFs for safety. This means that the managers of the ETF will actually buy the underlying securities.

In order to invest as tax-friendly as possible, we will also opt for capitalizing ETFs. These ETFs do not pay dividends. The dividend is therefore automatically reinvested. This is cheaper because you do not have to pay 30% withholding tax before you can reinvest the dividend. More money flowing back into your wallet!

Another advantage is that if we use Irish ETFs, we also get a discount on the withholding tax. Ireland has a tax treaty with various countries that allows the managers of the ETF to reclaim part of the withholding tax. This is almost impossible for a private person from Belgium!

Stocks for growth

The equity ETF of our portfolio must meet some of the conditions listed above. We want to be globally diversified and approach the market weight of the global market at the lowest possible price.

For this portion of the portfolio, the following ETF is currently best suited for this portfolio:

Vanguard FTSE All-World UCITS ETF USD Accumulation (EUR) | VWCE

This Vanguard ETF tracks the MSCI ACWI Index. This index covers almost the entire market! By purchasing this ETF, you invest in large and medium-sized companies from developed and emerging markets in one go. In addition, it is very cheap with an ongoing cost of only 0.22%!

Afbeelding waarop je ziet in welke landen de ACWI Index belegd
De markten die opgenomen zijn in de MSCI ACWI index
bron: MSCI

Voila with 1 ETF we have already gained exposure to almost the entire stock market, it couldn’t be easier! In addition, you should also know that, due to the fact that we invest in the entire market, we also gain exposure to multiple asset classes. We also invest in companies involved in real estate and precious metals, for example. In this way, our portfolio is much more sophisticated than it seems!

AFbeelding waarop je de sectorverdeling ziet van de ETF VWCE
Sector allocation of the ETF VWCE
bron: Morningstar

Bonds for stability

We also want to be as broadly diversified as possible for the stable part of the portfolio. Please note, the tax on bond ETFs is different than for stock ETFs. In addition to the stock market tax on sale, there is unfortunately also a capital gains tax for bond ETFs.

Opinions on what is the most cost-effective way to invest in bond ETFs is still unclear at this point. Some suggest that it is best to opt for a distributing ETF so that you do not have to pay capital gains tax when selling. Others argue that it is more beneficial to let the effect of compound interest play out over the long term by reinvesting the dividends through a capitalizing ETF.

Personally, as mentioned above, I choose a capitalizing ETF. Firstly, you receive more dividends due to the tax treaties and secondly, the dividends are automatically reinvested.

This leads to more simplicity and the simpler the better!

Okay, now that the tax has been settled, we can look at the role of bonds in the portfolio. We want to take as little risk as possible with this part of the portfolio, but we would also like to achieve some return.

The additional properties that our bond ETF must meet are:

  • Medium term
  • Hedged to euros
  • Index with government and corporate bonds

We will exclude exchange rate risk by using hedging and avoid major fluctuations by choosing an ETF with an average maturity. Long-term bonds are more volatile and therefore not suitable as a stable investment, short-term bonds offer too little return for the risks you take, so bonds with an average maturity are the sweet spot.

In addition, we want this ETF to also invest in both government and corporate bonds. Government bonds are safer but offer less return if we combine this with corporate bonds we take on a little more risk but we should normally get a little more return.

For our portfolio we will use the following bond ETF:

iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) | EUNA

This ETF contains both government and corporate bonds from around the world and is therefore a good approximation of the global bond market.

Please note: In the current interest rate climate, bonds no longer yield much, the investor must decide for himself whether he wishes to invest in bonds or whether he prefers the even safer cash instruments. If interest rates rise by 1%, bond prices will fall relative to their maturity. So suppose the term is 6 years and the interest rate rises by 1%, the bond ETF will fall by 6%

But: Bonds are used by many investors as a safe haven in times of stress on the stock market. This “flight to safety” shifts the money that was in stocks to bonds. As a result, the prices of bonds will rise when panic breaks out on the stock market. In addition, unlike government bonds, corporate bonds still yield a decent return.

Making a well-considered choice is therefore the message!

Recommended sources of information

And with this section we have come to the end of this starter guide with which I want to help you start investing. Normally you have now become much wiser in the field of investments. You can even put together a portfolio with the ETFs I have given above!

All that remains for me now is to give you my sources. As I said in the beginning I had to find all this information myself in various places. So I thought it would be useful for you if I would list these so that you can do your own research to see if what I have written here is true (Believe me, it is of no use to lie to you).. .

Books

Books contain a wealth of information and personally I have learned the most from reading books.

The links below take you to pages with lists of books:

Websites and forum

Apart from the fact that you can of course already find a lot of information on this website, there are a number of other websites that I use or have used a lot myself. So it is sometimes worthwhile to visit these websites and forums.

Of course there are many more websites like this, but normally you will find enough information on the above to keep you busy for a while.

If I have forgotten a website that is also worth adding to the list, be sure to let me know!

Other sources

Besides the well-known websites you can also visit this Facebook group:

DBB Privé Beleggingsclub

In addition, you can of course also follow the Facebook pages of the aforementioned websites. That way you can turn your Facebook news overview into a nice overview filled with mainly financial news.

Finally, Google is your friend. If there’s something you don’t know or want more info on, there’s no better place to look it up than Google. There is also a lot of information available on YouTube these days, so it pays to look here as well.

The End

And so we have come to the end of this Ultimate Guide to Getting Started with Investing.

This starter guide is basically a work in progress. This is because new information is constantly being added. So I also plan to update this post from time to time with new info. In addition, it is also the intention to add a piece in the future about the practical side of investing with information about choosing a good broker, how to place orders and much more.

So I would say add this page to your bookmarks so that you can always come back to look if you forgot something and secondly so that you are always aware of new additions!

What did you think of this guide? Are there things that are missing? Things you would add yourself? Feel free to leave your opinion in the comments below or on social media!

Tiziano Milani
Tiziano Milanihttps://www.debelgischebelegger.be
Hallo, ik ben Tiziano. Ik ben de auteur en oprichter van 'De Belgische Belegger'. Voel je vrij om met me te connecteren via Twitter en LinkedIn.

Lees verder

“UCB verwacht bovenste einde van bereik financiële voorspellingen 2022 te behalen”

"UCB verwacht bovenste einde van bereik financiële voorspellingen 2022 te behalen, Cimzia® haalt piekomzetdoelstelling van €2 miljard vroegtijdig"

Beursrally van De Tijd, join the team!

Ook dit jaar organiseert De Tijd weer de Beursrally. Doe mee, join het team en win leuke prijzen!

USD beleggers, tijd om te hedgen?

Het gevaar van wisselkoersrisico is niet te onderschatten.

VGP TRADING UPDATE 03/11/22

Lees hier de trading update van VGP van 3 november 2022.

Een blik achter de schermen bij ASML

ASML is een zeer bekend chipmaker. Ontdek in deze video hoe het er aan toe gaat.

Ook interessant

Ontvang 10% korting bij Binance!

spot_img

Begin met goedkoop beleggen via BUX!

spot_img