The topic of investment is quite rare. I would not dare to say that taboo, but very rare. If you have been investing for a while, surely you know what I mean. It is not a recurring conversation topic that can be talked freely in the office or with friends without feeling uncomfortable. Nor is it easy to understand by those who are not in the world.
Talking in your environment of actions, the S&P 500 or compound interest usually generates strange looks. Some think you are an ambitious speculator who, out of greed, puts your money at risk. Others imagine you in front of several computer screens as if you were the new Wolf of Wall Street. But no, the investment has nothing to do with it.
The problem is that in our country there is no financial culture. It is not that it is little; it is that there is none. And that is a serious problem, both for current generations (us) and for future ones (our children).
In that sense, I have it quite clear: I want my children to learn from an early age how important it is to save and how absurd it is to accumulate money in a bank checking account so that it can be returned by inflation. Yes, I will teach them financial education, and I will teach them to invest.
How will I do it? I could not tell you exactly. As you imagine, this is not going to convey a method step by step and that they implement it without more; if you have children, you will know that it is really them, and not us, who set the pace of their own learning. What I do know is the four investment tips that I want to instill. Many others are derived from their reading, but they will have to deduce that.
1. Do not speculate, invest
One of the main mistakes made by anyone who approaches the stock market for the first time is that they want to earn quick money. “If I invest 10,000 euros today, when will they become 20,000. ” Never. If you go with that mentality, most likely, you will end up slapping enough pasta.
The stock market is not about hitting balls or earning fast money, but about being constant and thinking in the long term. No one, absolutely no one, not even the big fund managers or the best investors on the planet, knows what will happen to the price of a short-term share. And if someone tells you otherwise, you’re kidding.
Therefore, the first advice I will give to my children is that they learn to differentiate speculation (wanting to earn money quickly and in the short term) from investment (see your money grow little by little and in the long term). I insist, in the long term, you invest; In the short term, you speculate.
2. Start doing it as soon as possible
I think that most of the investors in the room will agree with me that if they could go back in time, they would start investing earlier, being quite young. The long-term effects of compound interest are spectacular, and the difference between starting to invest a few years before or a few years later is decisive on the final result of the investment.
For example, you will understand it much better. For this, we are going to assume that we get an 8% annual return, which is more or less the average profitability of long-term global exchanges.
If at the age of 20 you started to invest 200 euros a month (2,400 euros a year), at 65 you would have accumulated equity slightly above one million euros. However, if you start investing ten years later, at 30, the assets you would accumulate would not reach 450,000 euros, less than half.
In our example, the difference between starting to invest ten years before or ten years later is more than half a million euros. Crazy.
As you can imagine, the second investment advice I will give to my children is that they start investing as soon as they start generating income. In fact, although they don’t know it yet (and I hope you don’t tell them), they already have an investment fund contracted to their name and to which I make periodic contributions every month. They are already investors.
3. Do not do market timing
Market timing is an investment strategy that consists in predicting the best time to enter the market and which one to exit. If the stock is low, shares are bought, and if it is high, they are sold, and profits are obtained. In my opinion, a bullshit sovereign.
Above I explained that it is impossible to know what will happen with the bag in the short term. Therefore, do market timing to decide when to invest and when it is not a waste of time and profitability.
In the blog of Index Capital, they have a very good article on this subject based on numerous studies that conclude that investors lose approximately 1% to 1.5% annually for trying to find out the best time to invest. You should check it out.
My paternal advice, in this case, will be: whatever happens around you, invest a fixed amount of money every month. It doesn’t matter if the price of oil goes down, if there is a war in the East, if interest rates go up, if Trump declares the nth trade war to China or if the Vikings invade Berlin.
Whatever happens in the world, make your periodic contribution to your investment portfolio and let time pass; Capitalism and compound interest will do the rest.
4. Don’t think you can be smarter than the market
In general, when we talk about investments, there are two possible strategies: active management and passive management.
The active investment is a type of investment in which the decision to invest in companies making its own judgment. A person, usually a professional manager, selects a series of assets that he considers stable and profitable and creates a fund or investment portfolio.
In passive investment, meanwhile, investment funds (index funds are called) are replicas of stock indexes such as the S&P 500, the Eurostoxx 50, or the MSCI World. If a company enters or leaves the index, it immediately enters or leaves the investment portfolio. There is no human intervention beyond replicating the composition of the index.
The objective of the active investment is to achieve a higher return than the market, while the objective of passive investment is to achieve exactly the same profitability as the market. In other words, active investment plays to win, while the passive plays to tie.