This guide helps you to start with investing. It’s a broadly diversified, low-cost portfolio without the risks of individual stocks. Set up once and rebalance yearly.
Today, you can buy three bananas for 60 Cents. Prices are constantly rising due to inflation. In years from now, you will eat less if you keep it in your savings account. To go bananas later, you should invest now.
|Initial Capital||Value in 20 years|
I’ll show you how to set up your portfolio. Your investments will be broadly diversified and will run on autopilot. It’ll be boring, though. Average market returns. Nothing fancy, but as little work from your side as possible.
I’ll link my resources and books for further reading, so that you can dig deeper.
This investing guide is for:
You should stop reading here if you want to get rich fast.
I read and study books from the most successful investors of our lifetime. I’ve no finance background. My passion is coding. I co-founded a software company and scaled it to over ten million in revenue. During that journey, I learned a lot about investing and finance. Eventually, I sold the business after a decade. You can learn in this guide how I manage my capital.
Spread your money to many continents, countries and industries. You don’t have to dig through individual exchanges, stocks and annual reports. Index funds were born to make your life easier. They track markets for you and do the background work, mostly automated based on a predefined index and at very low costs!
Only a few of the Forbes 400 actually did this. So how many of the Forbes 400 fortunes from 1982 remained on the list 20 years later? A measly 16%—were still on the list in 2002. To make it onto the 2002 Forbes 400, the average 1982 member needed to earn only a 4.5% average annual return on his wealth.Source: Benjamin Graham; Jason Zweig. The Intelligent Investor: The Definitive Book on Value Investing. HarperCollins.
94% of the differences in portfolio returns is explained by asset allocation.
Choosing your depot mix and the discipline to stick with it over a long period of time becomes your key to success. It is not your age that should determine the mix, but rather how quickly you want to get your capital and whether you have ever gone through a financial crisis.Source: Bogle, John C.. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits) (p. 224). Wiley.
50/50 stock/bond allocation? When the next turbulences on the stock markets come, your portfolio will not collapse so much and you can sleep more calmly.
The lowest point in the last 20 years was -32% and only after 3 years did it recover again. You should bear and sit out that much, otherwise you should increase your bond holdings.
Great if you already save a lot, even better if you invest this money in the best possible way. The annual inflation means that you can get less for your money. Remember the rule of ’72? Unfortunately this also works the other way round.
$50,000 will be worth of $32,562Your purchasing power, based on a 20-year inflation rate Source: calculator.net
Make sure you keep all variable costs as low as possible.
96 % of the best, do not manage to outperform the market average over a period of 15 years. Save yourself the time and get your average!
Index funds track a market index and give you a market average as your return. Fluctuations included, but at the lowest cost. ETFs are funds which you can trade on the stock exchanges (Exchange Traded Fund).
Use saving accounts or money market funds for your emergency fund and short-term payments. They are usually free of charge, you receive more interest than in your checking account. Bond funds are recommended for a holding period of at least 7 years.
Popular bond ETF options. Keep it simple as possible. (An introduction to government bond ETFs)
Comparison of accumulating ETFs and distributing ETFs outlines the difference between these share classes.
|European Government Bonds||Total Expense Ratio||Share Class|
|iShares Core Euro Government Bond Ucits ETF||0.09 %||Distributing|
|Xtrackers Eurozone Government Bond Ucits ETF 1C||0.15 %||Accumulating|
|European Corporate Bonds||Total Expense Ratio||Share Class|
|iShares Core Euro Corporate Bond UCITS ETF (Dist)||0.20 %||Distributing|
Diversify and invest your capital widely. On several continents, in many sectors and spread over many stocks. This is the key to long-term investing. Select low-cost investments to build your portfolio.
|Stocks From Developed and Emerging Countries Worldwide||Total Expense Ratio||Share Class|
|SPDR MSCI ACWI (All Country World) Ucits ETF||0.40 %||Accumulating|
|Vanguard FTSE All-World UCITS ETF||0.22 %||Distributing|
|Total-U.S. Equity Markets (Including Micro-Caps)||Total Expense Ratio||Share Class|
|Vanguard Total Stock Market ETF||0.03 %||Distributing|
|Fidelity Total Market Index Fund||0.035 %||Distributing|
|Developed and Emerging Non-U.S. Equity Markets||Total Expense Ratio||Share Class|
|Vanguard Total International Stock ETF||0.08 %||Distributing|
|Fidelity International Index Fund||0.035 %||Distributing|
Buy your ETFs at a discount broker. Commision and trading fees should be as low as possible. You want the compound interest to work for you as effectively as possible!
There is a wide range of brokers across the continent and every country has its own tax regulations. In some countries, local brokers will handle the tax reporting for you. I would recommend choosing a broker which handles the taxes for you. That way you can save a lot of paperwork for yourself and also in tax advisory fees.
There is a wide range of good brokers in the US, many of which are very affordable and with a wide range of index funds and ETFs to trade—often for free.
Establish a regular savings pattern, and begin the process of accumulating financial wealth as early as possible. The best way to save money is to arrange automatic deductions from your paycheck. Investing on auto-pilot! In addition, it can reduce your risk of temporarily inflated prices.
Markets will fluctuate differently, but to stay within your defined plan and risk, you should open and analyze your portfolio once a year. Let’s say that the equity funds have grown more strongly, you should either adjust your savings plan or buy more bonds. This balanced approach will help you to stay the course.
These are my favorite investing books. I can highly recommend reading them. I re-read them once in a while, especially when the markets are going crazy.