Investment for Dummies

Originally written on my Medium Blog: Investment for Dummies

What is Investment?

Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. It involves purchasing assets such as stocks, bonds, mutual funds, real estate, or other financial instruments, with the goal of increasing wealth over time.

Types of Investments

1. Stocks: Stocks represent ownership in a company. Investors buy shares of a company’s stock with the expectation that its value will increase over time, allowing them to profit from capital appreciation and dividends.
2. Bonds: Bonds are debt securities issued by governments or corporations to raise capital. Investors purchase bonds with the expectation of receiving periodic interest payments and the return of the bond’s face value at maturity.
3. Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets managed by professional fund managers. They offer diversification and professional management.
4. Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They provide diversification like mutual funds but offer intraday trading flexibility.
5. Real Estate: Investing in real estate involves purchasing properties — residential or commercial — to generate rental income or for capital appreciation.
6. Hedge Funds and Private Equity: These are alternative investment vehicles that pool capital from accredited investors to invest in a range of assets, often with higher risk and potential return than traditional investments.
7. Commodities and Precious Metals: Commodities such as crude oil, natural gas, agricultural products, and precious metals like gold and silver can be invested in directly or through futures contracts.

Essential Concepts for Beginners

• Investing: Long-term approach focusing on buying assets to build wealth over time.
• Trading: Short-term strategy involving frequent buying and selling of assets to profit from market fluctuations.
• Risk and Return: Higher returns generally come with higher risks. Investors must assess their risk tolerance before choosing investments.
• Diversification: Spreading investments across different asset classes (stocks, bonds, real estate) reduces risk by not putting all eggs in one basket.
• Liquidity: Refers to how easily an investment can be bought or sold without affecting its price. Cash is highly liquid, while real estate is less liquid.
• Investment Horizon: The length of time an investor plans to hold an investment before selling it. Long-term investors typically have more time to ride out market fluctuations.

Why Invest?

• Long-Term Wealth Building: Investments like stocks and real estate historically provide higher returns than cash savings.
• Inflation Hedge: Assets like gold preserve purchasing power over time due to their intrinsic value.

How to Invest Sensibly?

1. Diversify Income: Increase investment capacity by diversifying income streams.
2. Long-Term Approach: Most investments discussed here are suitable for long-term wealth accumulation.

Investment Strategies

Investment strategies vary widely depending on individual goals, risk tolerance, and market conditions. Here are some common strategies used by investors:

1. Dollar-Cost Averaging (DCA): This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. DCA helps smooth out the impact of market volatility over time.
2. Buy and Hold: This strategy involves buying investments and holding onto them for the long term, regardless of short-term market fluctuations. It’s based on the belief that over time, markets tend to rise despite short-term volatility.
3. Value Investing: This strategy involves finding undervalued stocks or assets that are trading below their intrinsic value. Value investors believe these investments have the potential for long-term growth.
4. Growth Investing: Growth investors focus on stocks or assets that have the potential for above-average growth, even if they are currently trading at high valuations.
5. Income Investing: Also known as dividend investing, this strategy focuses on generating a steady income stream from investments such as dividend-paying stocks, bonds, or real estate investment trusts (REITs).
6. Market Timing: This strategy involves trying to predict market trends and timing investments to buy low and sell high. It’s considered challenging and risky, as accurate market timing is difficult to achieve consistently.
7. Sector Rotation: Investors using this strategy rotate their investments among different sectors of the economy based on economic cycles or market conditions.
8. Hedge Funds: These are alternative investment vehicles that use various strategies, often more complex than traditional investments, to generate returns. They may include long and short positions, leverage, derivatives, and arbitrage.
9. Private Equity: This involves investing directly in private companies or acquiring stakes in private businesses not listed on public exchanges. Private equity investments typically have a longer time horizon and higher risk compared to publicly traded stocks.
10. Commodities Trading: Investors can trade commodities such as gold, silver, oil, and agricultural products through various strategies, including futures contracts, options, and exchange-traded funds (ETFs).

Cryptocurrency Investments:

• Complexity and Risk: Cryptocurrency investments are highly volatile and speculative. It’s crucial to thoroughly research and understand the market before investing.
• Strategies: such as Dollar-Cost Averaging (DCA) and HODL (Hold On for Dear Life), emphasizing the importance of a disciplined approach and risk management.

Asset Class Expectations and Economic Impact

Economic Impact on Investments

• Market Cycles: There’s a need to understand how economic cycles affect different asset classes such as stocks, bonds, and commodities.
• Sector Performance: Certain sectors may perform better or worse based on economic conditions (e.g., technology during growth phases, utilities during economic slowdowns).

Investment Strategies Based on Economic Conditions

Economy Strong, Growing, Low Unemployment

• Investment Options: Stocks, Real Estate, Commodities
• Rationale: In a strong economy with growing GDP and low unemployment, stocks tend to perform well due to increased consumer spending and business expansion. Real estate also benefits from economic growth, while commodities can capitalize on rising demand.

Economy Low Interest Rates, Weak Consumer Spending, High Unemployment

• Investment Options: Bonds, Cash, Cash Equivalents
• Rationale: During periods of low interest rates and weak consumer spending with high unemployment, investors tend to favor bonds for their relative stability and fixed income. Cash and cash equivalents provide liquidity and safety.

Economy Rising Prices, Wage Growth, High Interest Rates

• Investment Options: Gold, Stocks, Commodities
• Rationale: When prices are rising, wages are increasing, and interest rates are high, investments in gold can hedge against inflation. Stocks and commodities also tend to perform well as companies adjust to higher prices and economic growth.

Best Liquid Asset Classes

Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.

PS: Personal Investment Strategy

1. Income Diversification: I try my best to diversify my income so I can have multiple investment to rely on therefore I have my own calculation that for sure isn’t ‘economically or scientifically proofed’ :

Calculate Net Salary (L): Determine what’s left from the salary after spending and other deductions.

Divide into Three Parts: Split this remaining amount (L) into three equal parts (L/3).

Stage 1:

• Take the first third (L/3).
• Divide it into two equal parts: 50% to physical gold, 50% to digital gold.

Stage 2:

• Combine the second third (L/3) and the third third (L/3) to get (2L/3).
• Divide this amount into three equal parts:

1/3 of this combined amount to euros. (Can be stocks instead)

1/3 to dollars. (Can be stocks instead)

1/3 to Bitcoin (BTC).

Freelance/Projects Income :

• Invest in commodities and silver and/or stocks (I mostly invest in fintech companies, Soda Ash, Aluminum, copper manufacturers) depending on the monthly circumstances.

1. Long-Term Focus: Adjusting the division to world’s economic and country’s as well
2. Cryptocurrency Strategy: In my personal approach, I employ Dollar-Cost Averaging (DCA) over a monthly period (e.g., 29 or 30 days) for cryptocurrency investments, balancing risk and potential returns. I also prefer HODL.
3. Risk Management: Understand and manage investment risks through research, diversification, and disciplined investing meaning that I only invest what I can lose.
4. Monitoring everything: I made a PowerApps portfolio app where it calculated the division for me and input them with the current rate that is connected to an API call to update my profit each time ran in excel. Also I track my expenses and analyze them.

Additional Advices

• Invest Only What You Can Afford to Lose: Avoid financial vulnerability by investing responsibly. Never invest money that you cannot afford to lose.
• Set Precise Investment Goals: Determine what you want to achieve with your investments. Whether it’s saving for retirement, buying a home, or funding your children’s education, setting clear goals helps guide your investment decisions.
• Evaluate Your Finances Realistically: Understand your current financial situation, including income, expenses, and existing savings. Realistic evaluation helps you set achievable investment goals.
• Prioritize Goals by Urgency and Importance: Rank your investment goals based on their urgency and importance in your life. This helps you allocate resources effectively.
• Adapt to Life Changes: Be flexible with your investment strategy to accommodate changes in your life circumstances, such as job changes, family responsibilities, or economic conditions.
• Determine Your Investment Amount: Calculate how much you can comfortably invest without affecting your day-to-day financial obligations. Consider using strategies like Dollar-Cost Averaging (DCA) to invest regularly over time.

Recommendations:

Reading List

• “The Little Book of Common Sense Investing” by John C. Bogle: A classic guide to passive investing strategies.
• “Rich Dad Poor Dad” by Robert T. Kiyosaki: Offers insights into personal finance and investing from two perspectives.
• “The Richest Man in Babylon” by George S. Clason: Provides timeless financial principles through parables set in ancient Babylon.
• “The Intelligent Investor” by Benjamin Graham: A definitive book on value investing principles and strategies.
• “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf: Practical advice on low-cost investing inspired by John Bogle’s philosophy.

Podcasts

• Khamsa Business: Insights and discussions on business strategies and entrepreneurship.
• Sawalef Business: Explore various aspects of business and investing in the Arab world.
• Insan Podcast — Episode: Listen to this episode (specific episode link provided).
• We Study the Billionaires: Insights into the investment strategies and philosophies of the world’s top billionaires.
• Money for All of Us: Discusses personal finance, investing, and economics in an accessible manner.