Become an Investor (Part 10): Putting It All Together

We reached a nice round number using the globally accepted numeral system – a nice place to summarize what we’ve learned so far.

Without further ado, let’s dive into it.

Why invest?

First thing’s first – this question wasn’t answered as a part of the Become an Investor series, as I expect readers who land on the series to be already eager to learn. However, if someone needs a reminder or motivation on the why, reading the post Cash vs Stocks in 30 Years is the right place to start.

In summary, assets with intrinsic value outperform the no-risk cash alternatives every time. Also, the stock market is the best performing long-term asset class and a surefire way to build and maintain your wealth over the decades.

Here’s a picture from the above mentioned post showing the performance of $10k in cash and $10k in stocks for 30 years starting from 1988.

And in case you’re afraid of taking any risks with your money, subscribe in the box below, because in two weeks I’m releasing a post on Overcoming Investing Fear.

Spoiler alert though, it will link back to this series claiming that it’s a case of lack of knowledge.

Understand Investing

Okay, so once a person is interested in putting his money to work, he needs to understand the vehicles available to him and the strategies he could employ. This is the what – and it’s best explained in the post What is Investing?, the first post of this series.

I started with it because understanding what you’re actually doing is the only way to acquire sustainable knowledge or skills as you dive deeper in a field. Many people who want to employ their money, but still didn’t get it, use terms like trading and investing interchangeably. It’s not that big of an issue if they stay out of the markets, but once they start day-trading ETFs or trying to hit it big going all-in in a risky asset class while hoping to build long-term wealth, they’ll be headed towards a world of confusion (and losses).

The right thing to do is understanding what investing actually is and deciding whether it’s a type of approach to wealth management that would work for you. If it is, you continue to the how.

Stocks & Bonds

There are various financial instruments that we can trade or invest in, but stocks and bonds are the foundation of every portfolio. Understanding what they are and how they work is crucial to beginning your journey, so make sure to digest the material before utilizing them in a portfolio.

It’s important to distinguish between the two and understand that stocks represent ownership in a company and may or may not pay you a share of the profit. Also, you need to know that bonds are fixed-income debt instruments with lower risk than stocks. You can use stocks to maximize gains when times are good and bonds to minimize losses when times are bad. We’re covering the actual proportions later in the series.

So make sure to build a strong foundation by digesting the Introduction to Stocks & Bonds post before continuing to index investing.

Index Investing

This is the post which exposes you to market indices for the first time. It explains that a market index is a measure / indicator of the performance of a certain market and can be used as a benchmark to build an investment portfolio against. The post also covers various examples (such as DJIA, S&P 500, etc.) and explains the different ways of segmenting the market – by geography, industry, market capitalization, dividend per share, etc.

Most importantly, this post teaches the reader about diversification, market capitalization weighing, and the idea that you actually don’t have to rely on stock picking to be successful. I didn’t do it in the post itself, but I’ll quote Warren Buffet here. He says that diversification is for the ignorant… And not in a negative way. Here is the interview.

In case you need a reminder – index investing.

Index Funds and ETFs

Although they’re two separate posts, the introduction to index funds and ETFs posts is where the reader is taught about the actual financial products available to build a long-term portfolio with.

But before going in depth for both, we explain what mutual funds are, how they work, their structure and way of operating, and the different fees associated with them. I also point out the importance of keeping the fees low by giving an example of the long-term performance of an expensive fund and its lower returns compared to a less expensive alternative.

The reader becomes familiar that he can either go the path of index funds or the path of ETFs. I point out the differences between the two and explain that those are only differences – not pros or cons. I stress the fact that none is inherently better than the other and that the investor himself should assess his situation and pick the best option for him. But it all boils down to minimizing expenses and optimizing taxes.

For details, refer to the Mutual Funds and Index Funds and the ETFs posts, in that order.

The Cyclical Nature of the Economy

Here is where we took a step back from learning about financial instruments, just to cover the long-term performance of the underlying asset we actually invest in – the stock market.

I explain what bull markets and bear markets are, what is a correction, what is a recession, and what is a depression. I explain the cyclical nature of the economy and point to multiple recessions through history and the recovery that followed. Everything with the goal of pointing out that the ultimate direction of the market is up.

I also make sure to point out the uncertainty that comes with any forecasts by explaining that timing the market is a big challenge and that although we know that certain events will happen, we can’t plan for them.

It’s a really interesting read and I enjoyed writing it. But MonkWealth is for the readers as much as it is for me – understanding business cycles is crucial for making a decision about building long-term wealth through a passive portfolio. For more details, go to Bulls, Bears, Market Cycles, and Recessions.

Asset Allocation

One of the most important decisions a “lazy” investor has to make. And a pretty responsible one, as it’s the biggest factor on how your portfolio will perform over the years.

Asset allocation is wealth distribution strategy which determines how big of a percentage of the investor’s wealth will be allocated in each of the asset classes of interest. This is done based on his risk profile / risk tolerance, investment horizon, and goals.

In the simplest form, considering only stocks & bonds, the higher the stock allocation the more aggressive the investor is, while the higher the bond allocation, the more conservative he is. In the post we entertain various allocations, from 100/0 to 50/50 and even adding additional asset classes to the mix.

I also explain that we should also allocate within the high-level allocation, as not everyone is comfortable covering just one market (geographically), one industry, one type of countries (developed vs developing), or companies having the same market cap. For details, I’d link to the asset allocation post once again.

Investment Strategies

So, after an investor has a specific allocation in mind, the only thing left to do is to start placing them buy orders.

But how? When? All at once or frequently, and if so, how often?

The post about investment strategies explains multiple approaches of how the investments can be done and covers the pros and cons associated with each one.

Mainly, we’re looking into a lump-sum investment with a larger amount of money versus a DCA approach, building the portfolio over time. I give examples of all the options in both good and downturn economy and it becomes obvious that it always boils down to risk/reward scenario – whatever minimizes losses, minimizes gains as well.

To contribute to the dilemma, I add a few of the classics such as time in the market beats timing the market, but also past performance doesn’t guarantee future results. For details, check out Investment Strategies (Lump-Sum vs DCA).

In regards to market timing and quick profits, Fidelity made a study about the best performing portfolios on their platform and it turned out that it’s those of people who forgot they had an account. Or the meme paraphrased version: the best performing portfolios are those of dead people. Basically, stick to a passive investing strategy and let time take care of building your wealth.

Brokerages and Rebalancing

Up to this point, a passive investor should have enough knowledge to pick the right instrument, decide on the right allocation, build a portfolio, and start contributing to it frequently. But knowing is different than doing, so here I explain how the actual buying is done – either through a fund or through a broker. I explain how to approach placing an actual buy order and cover some of the more common types of orders and time-of-actions.

At the end, I cover the process of rebalancing – buying or selling in order to balance your portfolio in the initial asset allocation you had in mind. This process is best done annually or semi-annually, with the alternative being having a single world ETF portfolio and never have to rebalance. This is the ultimate lazy portfolio examples and is doable with ETFs such as VWRL or IWDA, depending on your desired allocation.

For details about rebalacing and the Trade Lifecycle, refer to the Part 9 of this series.

What’s next?

It feels strange to close this series, as they’ve been around for a while and I published a Become an Investor post almost each month since the inception of MonkWealth.

But I didn’t put Summary as a title, but went with Putting It All Together instead. The former implies an end, while the latter wraps up what we covered up to this point.

What does this mean?

I’m not saying that I’ll continue actively writing new posts for the series, but I’ll leave it closed for modification but open for extension. I think that the first 10 posts give a really solid and structured foundation to enthusiasts struggling to find a quality resource to learn from. Getting feedback that confirms it was a rewarding experience each time.

If you also liked it, I’d really appreciate if you share the Become an Investor series with other people or on social media. Most of you landed here trying to learn about investing, but the series can also serve as an introduction for people who still haven’t considered building & maintaining long-term wealth.

I feel confident that it does a great job introducing newcomers with the terminology, concepts, and the fundamentals of investing in the stock market, thus giving them a strong base they can continue to build up on and use when making financial decisions.

Thanks for sticking till Part 10 and I hope you found value in this series.

Good luck!