How to invest systematically and beautifully

1. Why personal finance is as important as investing.
2. How compound interest works and why investment income should be invested rather than spent.
3. Why checking your investment portfolio daily is a bad idea.

Investing is fun and exciting. But you should start by getting your personal finances in order, so that you have a solid foundation.

There are three main areas of focus here: make a financial cushion for a few months, deal with credit, and prepare to invest regularly.

Financial cushion

It is important to have a reserve of money for at least three months of your life, preferably more. This money does not need to be invested - it should be on deposits with the possibility of withdrawal or cards with interest on the balance. The cushion is not considered part of the investment portfolio - it is a reserve in case of illness, job loss or other force majeure.

Loans

Before investing, it is advisable to pay off loans. Paying off a loan early at 15% per annum is as good as investing at 15% per annum.

Free money

It is not possible to invest 3 thousand dollars once and become a millionaire in a few years. Regular replenishments help you reach your goal faster and restore your portfolio faster if it has fallen in value during the crisis. We will discuss this a little later in this lesson.

To understand what to invest in, how often and what strategy to choose, you need to understand your goals, investment horizon and attitude to risk.

For example, your goal is to buy an apartment in five years. Five years is not a very long time, so it is better that stocks do not take up more than half of the portfolio. If you are prepared to take only minimal risks, it is better to keep 60-70% in bonds or bond ETFs, 20-30% in equity ETFs, and allocate the remaining share to stocks.


If you are saving for a secure old age in 30 years, you can be more relaxed about risk: this is a long period of time, and temporary crises and market corrections are not so terrible for you. Such a portfolio can consist almost entirely of stocks.


The best solution is to make a document and write down everything in it as it is: your goals, the timeframe for achieving them and the investment portfolio you have chosen. You should also specify how often you plan to replenish the portfolio and by how much, when you will rebalance it, and what you will do in the event of a crisis. The composition of the portfolio should also be specified there.


For example, it goes like this.

Deadline

5 years

Asset allocation in the portfolio

70% Bonds or bond ETFs
20% Equity ETF
10% Stocks


The investment horizon is only 5 years, and I'm also not ready for a portfolio value drop of more than 10-15%

I will invest $300 per month. When replenishing it, I will buy assets whose share has decreased, and sometimes I will sell some of the assets that have gone up in price. Six months to a year before my goal, I will sell shares and invest the money I receive in bond ETFs.


* This is just an example, not a recommendation.


From there, just follow your plan. It may change over time if, for example, your goal changes or you have a different attitude to risk. It is better to have a plan and adjust it periodically than to have no plan at all.

Define in advance the purpose of your investment (amount, currency, purpose of this money), the timeframe for achieving it and your wishes for return and risk. This will help you create a reasonable investment portfolio.


Write it all down in as much detail as possible - this is your investment plan. Over time, the plan will have to be adjusted, but this is quite normal: you cannot foresee absolutely everything in advance.

A simple way to create capital is to set aside a certain portion of your income at regular intervals, for example 10% of your salary, and invest this money. Usually it is convenient to do this once a month, but other options are also possible: once a fortnight, once a quarter - whatever suits you.


Beginning investors often worry about which securities to buy when adding to their portfolio, and at what exact moment to buy them. But there is a simple strategy that helps you not to think about it.


The bottom line is that you regularly buy the same assets with the same amount of money - and it doesn't matter what happens in the stock market.


For example, you have assembled a portfolio for yourself: 60% in stocks and 40% in bonds. For simplicity, let's imagine that the SPY fund plays the role of stocks - stocks of large U.S. companies, and bonds are the AGG fund, consisting of U.S. corporate and government bonds. This is not a recommendation, just an example.


You set yourself a date for replenishment: for example, every first Monday of the month. And you decide that you are ready to invest, for example, $333 every month.


On the appointed date, you deposit $333 into your brokerage account. With $200 you buy SPY, and with $133 you take AGG. You do this every first Monday of the month, and it doesn't matter if the market is growing or there is a crisis. If the securities have fallen in price, you buy more securities for the same amount, if they have risen in price - less.


This strategy is called averaging even investment. The disadvantage of this approach is that it is boring. The plus side is that with this strategy you do not have to be afraid of an unexpected fall in securities. An unexpected drop can happen even the day after you buy the securities - so be it: in case of a drop, you will just buy more securities for the same money.


You can do something different and combine portfolio replenishment with rebalancing. In this case, you use the money you contributed to buy securities so that SPY's share in the portfolio becomes 60% and AGG's share becomes 40%. For example, if SPY gets very cheap in a crisis, you will spend all or almost all of your contribution to buy shares of this fund. Then your portfolio will almost always be in line with your investment plan.


It doesn't matter how often you replenish your portfolio - every two weeks, once a month or quarter. The main thing is to invest regularly and do it no matter what. And to reach your goal faster, try to gradually increase your contributions. If you invested $333 per month in the first year, try investing, for example, $417 per month in the next year, then $500 and so on.


If you already have a large amount of capital that you want to invest, this is not the case. It makes little sense to invest only part of the capital every month and keep the rest under the mattress waiting for the next month. On average, it is more profitable to invest everything at once. If you are afraid of a crisis, make a portfolio that is not too risky - with a large share of safe bonds.


To build a large capital, you need to invest additional money on a regular basis: for example, the same amount every month in the same assets. You can also choose another period, such as a quarter, but a month is usually the most convenient.


If you can increase your contributions over time by at least the rate of inflation, that's good. If you can greatly increase the amount of money you contribute to the portfolio, even better.

The essence of compound interest is that you receive income not only on the amount initially invested, but also on the income you have previously received from this amount. Compound interest accelerates the growth of capital.

When you receive income from investments (coupons, dividends, profits from the sale of securities), it is better not to withdraw this money from the brokerage account, but to reinvest it — that is, to buy more securities with it according to your investment plan. Then the profitability of your portfolio will apply not only to the money you initially invested, but also to the money you have already earned. On long distances it increases the result impressively.

Let’s say you invested $ 50,000 with a 10% annualized return, and you invested the money for 10 years. Each year the investment yielded $ 5,000, which you withdrew from your brokerage account. After 10 years, the total income from your brokerage account would be $ 50,000: 10 years x $ 5,000 per year.

But if you do not withdraw your earnings from the account, but use them to buy securities with the same yield, the result will be much more interesting. In the first year you will receive 10% of $ 50,000 — that is, $ 5,000. You invest this money and the next year you will get 10% of $ 55,000, i.e. $ 5,500. After 10 years you will have about $ 130,000 in your account, of which about $ 80,000 in income — $ 30,000 more than if you had withdrawn money from the account.

Many novice investors look at how their investment portfolio is doing every day (or even every hour). We do not advise you to do this if you are investing for a long period of time. Only traders who make several trades a day need to constantly monitor the dynamics of securities.

If you look at your portfolio often, it may provoke unnecessary actions: you will want to buy something and sell something. Many decisions will be based on emotions and will turn out to be wrong. You will waste your time, pay unnecessary commissions to the broker and may even make a loss.

If your portfolio is consistent with your goals, investment horizon and risk appetite, it is sufficient to do something with it only when you contribute money to it or do rebalancing - for example, once a month or once a quarter. This is especially true if you have a long-term, well-diversified portfolio.

If your investment portfolio still worries you, it may be too risky: you've taken on too many stocks and now you're worried about what's going to happen. It's worth reducing the proportion of stocks (including equity ETFs) and increasing the proportion of safe bonds (including bond ETFs). This will make the portfolio less risky and you will have no reason to worry.

 You should not check too often what is happening in your investment portfolio. Excessive attention encourages excessive activity, mistakes and additional commissions.

 If the portfolio is well diversified, it is enough to check it once a month or less often - when you replenish or rebalance it. If the portfolio bothers you and you want to monitor it every day, make it less risky.

Shares of individual companies sometimes grow by 10-20% in a day. You can earn more in a day than on a bank deposit in a year. And if you do this several times in a row, the result will be magnificent.

The temptation arises to engage in trading - speculative trading in securities: today you buy cheaper, tomorrow you sell more expensive, the day after tomorrow you repeat it with another company. Theoretically, this allows you to make a quick profit on the stock exchange.

In practice, you are more likely to lose money: it is almost impossible to predict regularly how the price of stocks or other assets will change. No one knows how to choose the most profitable assets without error, and losses or low returns are more likely than impressive profits. At the same time, active trading is time-consuming.

If you still want to try your hand at trading, deposit an amount that you are not afraid to lose. With this amount you will be able to have fun as you wish, and the main portfolio will not suffer.

Trading is interesting but very risky and time consuming.

If you want to try, allocate as much money for speculative trading as you can afford to lose. And experiment only with this money.

You don't have to look far for an example: in March 2020, the markets crashed due to the coronavirus. And at times like this, it may seem like you started investing for nothing. And if you didn't, you may now think that it's better not to start at all. But the point here is experience: investors who have been on the stock exchange for a long time do not sell off assets because of a market crash, do not panic and generally feel quite normal.


The difference between a novice and an experienced investor is that an experienced investor has a plan, an adequately formed attitude to risk and expectations from investments - exactly what we have been writing about all this course. And during collapses you should not sell off assets, but gain such experience: the experience of surviving collapses is especially valuable.


The main advice is not to make impulsive decisions. If your portfolio has fallen by a quarter and because of this you do not sleep well, it is time not to sell everything in the negative, but to answer the question: have you soberly assessed your readiness for risk? Perhaps you should buy ETFs rather than stocks, even though they have fallen in price, because they can fall in price even after you buy them, and staying awake is not an option at all.


If you have an investment plan, check with it - you may just need to adjust it and continue to stick to it. If you don't have a plan, now is the time to exhale and figure out what exactly you want to go to the stock exchange for, whether your initial expectations of returns are realistic, and what you can do to make those expectations match reality as much as possible.

We hope that during our course you have learned a lot of new and useful things, and that investments have become clearer and easier for you. If you are still in doubt, you can start with micro-investments. They are good because they are something between savings and investments. The essence of them is to get income from your own spending on everyday, most familiar things. Let's explain with an example.


Let's say you buy yourself a $3 cup of coffee on your way to work every day. You can just spend $3 a day and drink delicious coffee. Or you can pay $5 each time: 3$ will go to pay for the delicious coffee, and 2$ will go to the investment. It turns out that without noticing it, you will start investing and will do it regularly. And as we have already written above, regularity is the key to success.