The Beginner Investor's Roadmap: How to Start Investing in 2022
Oghenerukevwe Odjugo
Finance Professional | LinkedIn Top Voice in Finance and Economy
The 1st thing you need to know is there is no ONE place to start.
The investment world is quite vast. It covers everything from investing in yourself, i.e. your health, your knowledge, your expertise etc., to investing in assets like stocks, bonds, real estate, cryptocurrency, businesses like e-commerce, agriculture, etc. And because the world of investing is so diverse, it is important that you start learning about it before you put money in it.
If you are thinking about investing your money in 2022, you need to start with having savings SEPARATE from the money you have for investing. We talked about the importance of investing in this article on saving vs investment but investing should be a more long term endeavour than anything else.
The roadmap looks like this:
In periods when your investment is not doing so great, waiting for the investment to recover would be a better decision than selling at a loss. Why? Because you will lose money on that investment if you sell it at that time, and if the investment recovers later, you'll feel even worse.
Between February 21st, 2020, and March 20th, 2020, Tesla share price fell 52%. If you had an emergency or lost your job in 2020 as many people did and needed cash urgently, you'd have been forced to sell at those prices. However, between March 2020, and January 8th, 2021, Tesla share price rose over 930%! Having savings to carry you through the financial market downturns can be the difference between losing 50% and 10x your money.
This is where your savings comes in. In times like those, you can dip into your savings to support yourself and avoid touching your investment altogether. Or, if you still have income coming in, you can use some of your savings to buy more of your investment and take advantage of Dollar-cost averaging.
An emergency fund is simply 3-6 months of your monthly expenses saved up. E.g. if you spend $2,000 on average every month between housing, food, entertainment etc., your emergency fund would be $6k-$12k. You want to put your emergency fund in a savings account that gives you some interest so you aren't losing too much to inflation, but you don't want to put this in any investment vehicle, so you don't run the risk of losing money if there's an economic downturn.
There is no rule that says your emergency fund must stop at 6 months. If you can afford to have up to 1 year of expenses stored up, that'd give you even more legroom if something affects your primary source of income. However, 3-6 months is recommended, so you have something for emergencies, but also so you don't have too much money tied down and not working for you. Because as we learnt in this article, inflation reduces the value of savings.
You don't need to have "finish" saving first before you start an emergency fund, and then after you have a full emergency fund, start investing. While there is nothing wrong with doing that, it would be incredibly difficult for someone who isn't earning a lot of money or earning in large chunks to do this. Also, if you're waiting to finish saving and building your emergency fund before you start investing, you might end up missing out on good opportunities to invest while you wait.
A practical way to go about this would be to do these concurrently. Of your monthly or annual income, you can assign an amount for saving, emergency fund and investing. When starting, you want to allocate more of your money to your emergency fund so you can build that up quickly and be done with it. Saving is a lifelong thing that you can take out of and replenish every now and then. And when you're starting investing, you don't want to jump in with a lot of money. You may not be comfortable seeing it reduce in value in a short time. Here's an example:
If you earn $3,000 monthly, spend $2,000, you are left with $1,000. This means that your emergency fund of 3-6 months of expenses would be about $6,000 to $12,000 or to allow for more wiggle room with inflation and unexpected expenses, say $15,000. So you have an emergency fund with a target of $15k.
Of the $1,000 you have leftover, you can put $500 into your emergency fund monthly, $200 into savings and $300 towards your investments. In 12-30 months, you would have your emergency fund fully built, and you'll have $2.4k-$6k in savings and $3.6k-$9k invested. With any luck, your investments should be gaining some returns in the time you've invested so you would have more money invested that you can move to supplement your savings or reinvest to get a larger investment. This is a very simplified example that isn't an exact science; it just gives a rough idea of how to do these things.
My rationale for assigning more to the emergency fund is, the world is quite uncertain, and a few bad things can make you need your emergency fund sooner than later, so you want to build that as fast as possible. Plus the faster that nest egg is built, the faster you can reassign the money going to your emergency fund to your investments.
Where do you start investing?
You start by knowing your options.
In many countries around the world, the options differ. And depending on the amount you have available, your options also vary. A billionaire, for example, can have access to investing in startups, private planes, cruise ships etc., but a young person from a middle-class family starting their 1st job may not have this access. Also, in some countries, there are startups giving access to international stock market investing, investing in agritech, in smaller units of real estate, cryptocurrency etc., while other countries don't have these options. So what are the options available to you considering where you live and the amount of money you have? You have to do a bit of research here.
But here's a list of some of the generally available options.
Treasury Bills & Bonds
When a government needs extra cash, they can issue an asset called a Treasury bill (T-bill) or bond to borrow money from investors that they pay a small interest on over 1 year, 5 years, 10 years, 30 years or even 100 years! and after the time elapses, they pay back the initial amount they borrowed. For example, if a 30-year bond has a coupon (interest) of 5%, and you invest $1,000 in that bond, that means, every year, the government will pay you $50, and after 30 years, they'll pay back the $1,000 you invested initially.
Companies can also issue bonds, called corporate bonds. Those are often higher risk and give better returns than government bonds. Where you can buy T-Bills and bonds is dependent on the country you're in. You generally could buy them from a bank or a brokerage. In the US, for example, Treasury bonds and bills can be purchased through?TreasuryDirect.
Bonds are often referred to as risk-free investments because the government is unlikely to default. However, we have seen some examples of government defaults in the past. Because bonds can be such low risk, the coupons governments of developed nations offer are pretty low. It could be as low as 0.75% for a 2-year bond or 2% for a 30-year bond. However, high net worth individuals tend to own bonds for security. While 2% of $100 or even $10,000 is not a lot of money to earn in a year, 2% of $10 billion is.
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Mutual funds and Exchange Traded Funds (ETF)
You can also invest in a mutual fund which is simply a pool of funds collected from different people and invested in an agreed vehicle. An example of this is a group of people or companies can pool money together to buy stocks of various energy companies. It's similar to the Nigerian concept of Esusu.
An ETF is simply a mutual fund that is traded on an exchange, e.g. the Vanguard S&P 500. They can offer anywhere from 1% to over 30% per year, depending on how well the assets within the fund perform. Mutual funds can invest in anything. There can be Bond ETFs, stock ETFs, recently cryptocurrency ETFs. You can buy mutual funds from brokerages.
Precious metals like gold, silver etc.
In general, investors looking to invest in precious metals directly have three choices: purchase the physical asset, buy shares of a mutual fund or ETF that replicates the price of gold, or trade futures and options in the commodities market. Check out my article on gold investing here.
Real estate
You can invest in real estate in a few ways.
Over the last decade, it seems real estate prices have been on a consistent rise. However, with more central banks saying they'll increase interest rates to combat inflation, we might see a slow down in the rise of real estate prices. Because only those who can qualify for loans at the new interest rates would be able to afford them, thus reducing demand for housing which has been fueling the sharp increases we've been seeing. Check out my article on real estate investing here.
Stock market
The stock market has become a huge topic of discussion, especially over the last couple of years. With stocks like Gamestop giving people 10 times their money in a few days, you might think this is the best place to start. However, it is important to note that since May 2020, the investment world has been thrown into a new regime.
With government stimulus packages pushing a lot of money into stocks and low-interest rates on bonds forcing people looking for positive returns to look for investments like stocks, a lot of money has been chasing stocks. But as governments raise interest rates and sell their bonds (in the US), this would take some of that money off the table which could cause stock prices to drop.
As explained here, the stocks that will be affected by this are the growth stocks that have been making people a lot of money in the last 2 years. We've already started seeing this happening in 2021. One of the top growth ETFs, Cathie Wood's ARK?Innovation ETF (ARKK), was?down 22%?in 2021, its worst annual performance since its inception in October 2014.
However, high-quality companies that will be around for the long term will still deliver great returns over the long term (decades) if you stay invested for that time.
I've written quite a few articles on investing in the stock market. This thread lists out all of them.
Cryptocurrency
You can also invest in crypto. But like stocks, the reduced money in markets can affect the prices of crypto in 2022 in a way it didn't affect them in the last 2 years. Here are links to the articles I've written about crypto in the past: Cryptocurrency basics, Is Bitcoin doomed to fail, some factors that may cause Bitcoin's rise or fall.
NFTs and Art
Before now, investing in art used to be something that only the ultra-wealthy did. In the age of NFTs, that has changed dramatically. Today, the average person can buy digital art easily, and if someone believes that art is worth more, they can sell it at a higher price than they bought. Check out my article on NFTs here.
Where should you start?
Ideally, you want to start with the one you understand best. But if all of them sound unfamiliar to you, you might want to start with a lower risk option and build your risk appetite up as you gain more understanding. Bonds and T-bills offer such low returns, so it's probably not worth starting there. You can start with investing in some mutual funds or ETFs, then real estate, then stocks and crypto. This is, of course, dependent on what options you have access to.
Final Thoughts
Some people have made millions, even billions, from investing in every asset listed above. Some others also lost a lot of money from investing in them. All this to say, there is no right or wrong asset to invest in. What you ultimately invest in should depend on which asset you understand best and how much risk you are comfortable taking.
When it comes to investing, you must always consider the risk vs the reward. As human beings, we often see the rewards people get and not the risk. We hear that Gamestop 10x in 9 trading days or that an investment 100x in 1 year, and we immediately want to invest in that company without stopping to think about the risk.
The simple way to think about risk and reward in investing is, the higher the risk, the higher the reward. And the lower the reward, the lower the risk. The same stock/crypto that can give you 100x return in 1 year also has a high chance for turning your investment to 0 in the same time—case in point squid coin.
Always remember, when you hear of an investment that can grow your money exponentially in a short time, chances are, the risk is also sky high, and there is also a higher probability that you'll lose than win. You don't want to invest out of FOMO, but you don't also want to be too scared of investing that you don't invest at all. Be cautious but not fearful.
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3 年Thanks for posting
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3 年I need to know where to invest
Entrepreneur
3 年That was an insightful article & helpful also. I liked how you explained risk factors easily.