In budgeting/ Investing

Why everyone should start investing into stock market

Saving money to piggy bank to invest into stock market

A common idea is that you can’t take your money to the grave. So why not spend it all, live while we are young? The problem with this is, superficial things won’t make us truly happy. There are studies actually showing that n the end, lottery winner is not any happier after little time has passed. Travelling, on the other hand is different. It is focused on experience and in the sense of freedom. You work hard to save money and hen your off to the world, free as a bird. Exploring new cultures and finding your inner hippie.

 

What makes most people come back after a while?

 

Lack of money.

 

Then you’ll have to come back, and have to take that shitty job, grinding away, only dreaming of the days you were free and roaming around. The freedom goes away after a while. What a better plan in my opinion is to save the money for travelling, yes, but putting majority of the money into savings stock market. What that does, it gives you the true freedom. You are not forced to make any kinds of decisions because of the need for money.

 

The mindset of spending everything you earn seems to be similar in a lot of people. All money earned goes into everyday life and spending, instead of planning ahead and saving. It seems to be a social norm to carefree about money. This is largely encouraged by the media and the world around us.

 

A lot of money goes to new dresses for every single event or for a newest iPhone every year even though the consumers seem to fail to recognize if there were even any difference to the last one. I remember those videos where the interviewee asks random people on the streets to comment on how the “new iPhone” seems to be better than the one from last year, while giving them the model from last year. Everyone seemed to be certain that this one was bigger and lighter with better screen, even though it was exactly the same phone.

 

More people would have money left over if the just consumed according to their real needs, not the ones created by clever marketing.

 

Why investing into stock market?

 

Is it not good enough to just save money to achieve these things without getting involved into stock market, isn’t that similar to gambling?

 

It is a good idea to always save some money. The thing is, over time, the value of the money in your bank account is decreasing because of inflation. Over time, the value of the money decreases by the amount of inflation.

 

On the other hand, average long-time return from stock market is 7%.* In shorter term, it can be anything. Other point is that stock market can be like gambling, for example when talking about day trading, where stocks are purchased and sold within same day. If stock are purchased with more reasonable and long-term strategies with proper allocation ans careful selection of companies, the risk is significantly lower.

 

The story that inspired me

Stocks are a reasonable method of saving money, but that is not the most exiting part. What is the most exiting part is the compound interest and exponential growth, always explained in business school with an example about inventor of a check board (I quoted the story from this website):

 

“The king was a big chess enthusiast and had the habit of challenging wise visitors to a game of chess. One day a traveling sage was challenged by the king. To motivate his opponent the king offered any reward that the sage could name. The sage modestly asked just for a few grains of rice in the following manner: the king was to put a single grain of rice on the first chess square and double it on every consequent one.

 

Having lost the game and being a man of his word the king ordered a bag of rice to be brought to the chess board. Then he started placing rice grains according to the arrangement: 1 grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on.

 

Following the exponential growth of the rice payment the king quickly realized that he was unable to fulfill his promise because on the twentieth square the king would have had to put 1,000,000 grains of rice. On the fortieth square the king would have had to put 1,000,000,000 grains of rice. And, finally on the sixty fourth square the king would have had to put more than 18,000,000,000,000,000,000 grains of rice which is equal to about 210 billion tons and is allegedly sufficient to cover the whole territory of India with a meter thick layer of rice. “

 

The moral of the story for stock investing is:

 

Every penny you invest turns into 7% in a year. That amount turns into 7% the next and so on. So, the amount of money keeps on growing each year exponentially. One of the worlds richest men, Warren Buffet, is a stock investor. So, investing definitely should not be underestimated.

 

Great, you are interested. What next?

 

After learning all this, excitement hits in. I am currently at this point in my journey. I have a master’s degree in business and these are not new things for me. Somehow I was always still scared of it, what if I loose all my money, and most importantly, as a student I didn’t have money to invest.

 

It is a common guide that you should not invest any money that might be extremely important to you soon.

 

You have to be in a situation that you might have certain amount of money each month to put aside after you paid all your mandatory expenses. Otherwise it might be a disaster because you would have to sell your stock in unfavorable position and loose money. Ideal is to buy when it is at its cheapest and sell when the stock prices have inflated.

 

Step-by-step plan

 

These are the steps I plan to take now to start:

 

  1. Start saving certain amount per month
  2. Research everything about investing and different startegies
  3. Decide what fits your personality and start investing

 

I have made a blog post where I explain my strategy for saving, click on here if you are interested.

 

Basically, it follows zero-based budgeting where you allocate your whole salary into certain accounts. This is the part where you can combine saving for travel and for investing. Bot should be on your priority list, not one or another.

 

I believe that balance is the key here.

It is important to travel and learn from the world. It is equally as important to play your cards right when using money and being smart with it. Too much of the blogs focus strongly in living in the moment and spending everything on travel.

 

Next, is to research as much as possible. Books, YouTube, blogs articles… As much as you can.

 

What I found helpful and where I would start, is to investigate Warren Buffet’s investment strategies. He focuses on finding quality companies that last over 10 years time span and purchasing them only when the stock in undervalued.

 

Best way to invest for beginner

 

Also a good place to start for beginner are funds. It is an easy way of getting into investing for beginners, with little risks. The economy is always at move and goes up and down all the time. It is impossible to predict what is going to happen next, even if some people claim to be able to do that.

 

A person who is steadily saving and investing is actually benefiting from this. When the economy is low, the stock prices are also lower. So, you’ll end up automatically purchasing a higher number of shares and an opposite happens in high economy, you’ll automatically purchase a smaller number of shares because of inflated prices. You will end up purchasing more when it’s cheaper and less when the prices are inflated. Best kinds of funds are index funds and ETF-funds that are managed passively (So not by actual person who will take a cut) **

 

This is where you decide the strategy you want to go with that fits your personality. Last step is to take the leap and start actually investing!

 

What people think many times that investing is this really difficult and complicated thing when it is actually not. Many of the professionals make it sound impossible, when there are actual studies where monkeys made better investments than actual professionals! *** The reality is that you have to understand the basics and choose a strategy that fits the amount of knowledge you have. Important thing is to stray away from speculations and constant buying and selling frantically.

 

Footnotes

*This popular idea comes from Warren Buffet, who said in one of his articles following:

“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”

** If you are interested, I got this idea from a Finnish book “Erilainen ote omaan talouteen” by Havia, Lappalainen and Rinta-Jouppi. Unfortunately this book is only in Finnish

*** Idea from the same book. Actual study for example Comley P. (2012)Monkey with a pin

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