In my last three blogs I focussed on how I started on the stock market (part 1, part 2) and what the impact of time is on your returns because of compound interest. In this blog I want to explain how easy it is to get started with investing, and what I think is the safest way to start doing this, without having a lot of knowledge about stocks.
What is a stock?
When you own a stock, you own a part of that company. Let’s say you want to buy 10 shares of Apple. Each share of Apple is currently worth around $162, which would make your investment $1,620. Through this purchase you now own 10 of the 16,070,000,000 shares that exist (“outstanding shares”). Which means you are entitled to a part (10 / 16,070,000,000) of Apples’ assets and profits.
Owning a single stock can be very profitable, but also very risky. If in this example Apples’ share price would go down to $150, your 10 shares would only be worth $1,500 and you would have lost $120. If the price would have gone up to $200, your share would be worth $2,000 and you would have made $380. Putting all your eggs into one basket will increase the chance that you will lose a big proportion of your investment through bad luck. The number one rule of Warren Buffet is ‘Never lose money’, so let’s try to avoid losing.
Spread your risk – ETFs
An easy way to prevent putting all your eggs in one basket is by buying an ETF that contains hundreds or thousands of these baskets. In one of my previous blogs I explained what an ETF is, so I will not repeat that. There are a lot of choices when it comes to ETFs. The ones that are best for new investors are the ones that represent the entire market. The entire market is also a broad term, because you can look at the whole world, your region or your country as the entire market. I personally look at all three of them and decided to buy the following ETFs:
- VWRL – Vanguard FTSE All-World UCITS ETF ESD Dis
An ETF that tracks the biggest companies in the world. - IUSA – iShares Core S&P 500 UCITS ETF USD (Dist)
An ETF that tracks the biggest companies in the USA. - IMEU – iShares Core MSCI Europe UCITS ETF EUR Dist
An ETF that tracks the biggest companies in Europe. - IAEX – iShares AEX UCITS ETF EUR (Dist)
An ETF that tracks the biggest companies in The Netherlands.
The first four letters are what they call the ‘Ticker’ and they represent a letter combination that is specific for that stock or ETF. Apple is called AAPL, Microsoft is MSFT and Foot Locker is FL. VWRL, IUSA, IMEU and IAEX are the ETFs that I own.
Selecting a broker
So how do you buy a stock or ETF? You will need a broker for that. A whole blog could be writing about brokers alone. The best one for you depends on different factors, and depends on where you live, how often you want to trade and what your experience is. I can share with you the 3 brokers that I have, but do your own research if you want to pick your broker. I use DeGiro, Interactive Brokers and BUX.
- DeGiro is a cheap and easy broker that I think is only available in parts of Europe. They offer low commissions and let you trade a selected amount of ETFs for free.
- Interactive Brokers is a worldwide broker. They are not very expensive and offer a wide variety of products, including options.
- BUX – I just got it because they offered me a free share after opening and funding the account. If you want to know more about this, just let me know, then we both get another free share.
If you have the ability to use DeGiro, I can just tell you that I am happy with their services and fees. If you don’t have access to DeGiro, then Interactive Brokers (international) is a good alternative. In the USA there are many brokers that offer cheap or free trading, but I have no experience with them.
So assume you decided which ETF(s) you want to buy and you have a broker account, now you only have to decide how to invest. Well this is the easy part. Once per month, after you get your salary or the Xth day of the month, you put the same amount of money into your broker account. With this money you buy the ETF(s) that you want to buy, until there’s zero cash in your broker. You do this every month, at the same time and the rest of your month. You buy when the ETF is high and you buy when the ETF is low. They call this dollar cost averaging (DCA). You do not look at your account and you just live your life. If you do this monthly and look back after 10-20 years, you will have noticed that without spending a lot of effort, you have made a fortune. The effect of compound interest (which I explained in my last blog) and dollar cost averaging will have made you rich.
Conclusion
Of course even investing in ETFs is not without risk. But the risk you take is very small and when you have a long horizon, this strategy can almost never fail. So in summary this is what you do:
- You pick one or several ETFs that you want to invest in.
- You open up an account with a broker account.
- Every Xth day of the month, you buy the ETF(s).
- After many years you look back and the chances are very high that you have made a big return.
I hope you enjoyed this blog and that it will guide you a little bit with investing in the stock market. If it was useful to you, or if you have any feedback, please feel free to contact me!