We are living in uncertain times. This morning, we watched COVID-19 cases globally surpass the one million mark, and in little over a month the S&P/ASX 200 (INDEXASX: XJO) has fallen around 30%.
This is what I’m telling my closest friends right now about investing.
Everyone is interested in investing
Over the last month, I’ve had several friends (those who have been lucky enough to keep their jobs) come to me and ask, “Should I start putting money into shares?”
My answer has nothing to do with pandemics, or bailouts, or unemployment rates, and it doesn’t change depending on the time of day or the person I’m talking to.
I always start by asking something along the lines of, “That’s great that you’re interested in investing. Why do you want to invest?”
Responses range from, “I have some spare cash and interest rates are very low” to “I read that now is a good time to invest because the market has dropped” to “I just want to make some extra money”. Once I know my friend’s motives, I can tailor a response.
Now, I’m in my early 20’s, as are most of my friends, so it’s important to remember this won’t apply to everyone, but I think it’s a great starting point. I would start by explaining the basics of investing: that it is ownership of a company; that you must pay brokerage fees when you buy and sell; the basics of dividends; the concept of diversification, and so on.
Often, you see boredom and random head-nodding in response. “I just want to make some money, but this sounds complicated”. While this information might not seem so important, it is imperative to understand what you’re actually doing when you start buying shares.
Once we have the basics out of the way, we simplify it. Investing doesn’t have to be complicated. Once I know my friend’s motivations for investing, and I’ve gauged their interest level in the details, we can talk about actually taking action.
This starts with things like exchange-traded funds (ETFs) which allow an investor to hold shares in hundreds of companies with a single purchase. If they’re interested in buying individual shares, we may look at a play-money account first before investing the real thing.
The most important point though, and the one that I cannot emphasise enough is that you must approach investing from a long-term perspective. This is especially important now when friends ask me if it’s a good time to invest. If you’re hoping to make a quick buck, then I have no idea if now is a good time. If you’re truly in it for the long run, it’s virtually always a good time. As the saying goes, the best time to start was yesterday.
Why is any of this important?
Why do motivations matter?
Why does knowing the details or taking a long-term approach matter?
It matters for the occasions like the one we are witnessing right now.
If you have a vague idea of why you’d like to invest, or if you don’t know what your shares truly represent, or if you just took a short-term approach, you are destined to always sell in a downturn and lose money over the long-run.
The reason that I advocate for keeping investing simple is so that when we face a crisis like we are now, you can have confidence in your investments and not be tempted to sell.
I currently only hold ETFs, and I am (so far) making it through my first bear market without panicking, selling, or even really thinking about my shares. I intend to hold these ETFs for decades, and over that timeframe, a 30% drop will barely register on a graph.
I won’t generate record-breaking returns, but I’m setting myself up for a secure future, and I believe just about everyone can do the same, especially young investors.
Know your motivations, understand what you own, focus on the long-term, and when the bad times come, you’ll be able to spend your time worrying about your family and friends, rather than your shares.
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Disclaimer: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
