With many fresh graduates facing the harrowing but very real prospect of unemployment these days, many are looking for sources of passive income instead. If you’re thinking of investing in the stock market, here are some tips to make your endeavour a truly rewarding one.
Start early, even if it’s a small sum
Remember this: “Time” is your best friend when it comes to generating returns because of a concept called compounding returns. Compounding interests allow your money to earn money for you over time, which can be exponential as time passes. Consider our example below.
Two people invest RM10,000 with no additional investments, and earn a 10% return every year. The only difference is that “A” began investing at age 20, and “B” at age 30.
By age 65, “A” has more than double what “B” has, thanks to 10 extra years. As Warren Buffett said: “The best thing you can do for your retirement savings is to start investing early.”
Therefore, millennials should start investing as early as possible, even if it’s a small sum. Doing so can help you learn from small mistakes that won’t ruin you financially forever, and also benefit from the long-term rewards as you can compound your wealth.
Contrary to the common belief that investing conservatively is the best way to increase wealth, we actually believe young investors should invest aggressively. This means exploring international markets to find promising investments, and employing leverage aggressively to boost returns. This second concept is worth expanding on.
Two Yale scholars published a study that revealed how “by employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time.”
Essentially, this means that most people only invest a lot when they were old. This in turn shows they were extremely underinvested when they were young.
However, it’s better for any investor to be exposed to the stock market for a long time since short exposures can make one vulnerable. Therefore, it actually is advisable to borrow to invest in stocks when one is young and only have a few thousand ringgit in the market.
Don’t rely on traditional financial advisors
You should always buy only what you know. This means you have to understand what an investment is truly worth before committing to it.
Instead of asking questions like “will Facebook’s stock go up in the next month or so”, you should be asking “how does Facebook make money?”, “how defensible is its income stream if a competitor tries to take away its market share?”, and “what would Facebook be ultimately worth in the long run?”
You should learn about the stocks, Exchange-Traded Funds (ETFs) and bonds you are purchasing, and make calculated decisions to purchase based on sound logic.
Consider what you are paying, how much you can earn if you are right, and how much you will lose if you are wrong.
Of course, this can be a rather steep learning curve for most. Instead, many might be tempted to blindly follow recommendations offered by traditional financial advisors who sell different funds and stocks to them.
However, this is usually not a good idea. Financial advisors make money by selling you things, not by helping you make money. They also tend to come with a rather high commission rate.
For novice investors who aren’t yet comfortable with picking their own stocks, look for robot advisors that provide a decent amount of diversification with very low fees while you learn how to invest.
At the end of the day, the goal of investing is to make money. And to do so, the most important thing to do is pick the right investments.
Therefore, it is always a good idea to start making the effort to learn how to invest well when you still have a lot of time on your side.
Starting early is an efficient way of providing both an opportunity to learn through small mistakes and let time create wealth for you.
This article first appeared in thenewsavvy.com
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