Simple investing ideas. What is investing? And why do it?

Maths in school is too far removed from the real-world. Way. Too. Academic. Maths would have been much more interesting if it was taught in the context of investing, and why it matters. Note, I'm not an investing expert - I'm self-taught; the way I describe investing here is overly simplistic, but that's because I don't think we need to know the technical details about making good investments. With some basic knowledge, we can experience the life changing long-term gains it produces. This was actually written the same day I made my first investment. What is presented here (and in the reference list) is what I believe is important to know about - leave the rest to the experts.

#1. What investing is

Investing (as described here in my simplistic terms) is giving a sum of your money that would usually be stored in a bank or under your pillow to a company (1). If the company does well, they pay you back, and your money grows. You can then keep the profits, or keep reinvesting into the company.

#2. Why it matters

It was not always possible to invest in companies (2). In times gone by, companies were restricted in who they could receive funding from. The idea that everyday people can contribute their cash to support wider developments is relatively new, historically speaking. Today individuals around the world can choose which companies to invest in (via the stock market and associated things). This matters because it means normal people have more of a choice in how the world works. With the click of a mouse, we can invest in companies that produce weapons or fast food; or we can invest in companies that build electric cars or sustainable infrastructure. We can support companies that align to our values and punish those that don't (by not investing in them). Investing today is decentralised; anyone can do it, generally all you need is some spare cash - £100 or less - and a working internet connection. The idea that investing is for rich people is a complete myth; it's not true. It's a shame that investment wasn't included in maths at school because it's part of what makes the world go round, is something that helps people grow their wealth, and is easily accessible to most adults around the world.

#3. Why it works

It works in various ways. It works because we can support company X, company X does very well, then we get some extra money back from company X. The problem, of course, is that if we support company X and company X gets taken down for fraud, malpractice, or simply goes bankrupt, we've lost our money. Investing generally works because of two methods that counter this: time and diversification (1).

Time refers to... The length of time. Over days, weeks, and months, things fluctuate. Over years, tens of years, and a century, things are more stable. This is true in our personal lives; it's true in evolutionary time; and it's true in how companies work. Time irons out losses, and compounds gains (more on compounding later). Time is crucial here. If you check on your investments every day, every month - you are not an investor; you are a trader (academic studies suggest amateur traders lose much more than they gain, 3). If you check your investments every year or so, adding to them and tinkering a little, you are an investor as described here. Investment requires time. Depending on how aggressively you pursue it depends on how much you'll get in return. A rule of thumb: 10 years for sizeable returns - but ideally 25+ years. It requires time and continual investment, such as a "top up" amount of $100 each month into an investment account.

Diversification refers to the ability of an investor (like me or you) to give money to various companies or classes of asset. It means instead of investing in just company X, we can invest in 250 companies at the same time (4). A group of companies is called an index. These companies can be grouped in different ways, like their size, their sector, or something else (FTSE 100 = 100 biggest companies in UK; S&P 500 = 500 biggest companies in America, for example). An index fund is the ability to "buy into" many different companies at the same time, spreading the down-side (of risk), and maximising the upside (of reward). These 250 companies could spread be around the world. It means that if 25 companies do terribly, 50 or so might so really well, and balance out the gains and losses. Historically it means gains (only in the long term). This is diversification explained simply, but there are many ways to allocate your cash meaning you protect yourself against the down-side of market crashes, or company malpractice or - whatever.

#4. Compound awareness: how much does investment make?

Investing works because of compounding (1). Compounding is closely related to time; compounding only works because of time, which smooths out variability. Variability means shocks in the market (the financial crisis 2007-2008, COVID 19 pandemic, Liz Truss in government, etc). In the long run, these events matter little to financial markets, which do recover, rebuild, and develop anew (5). This is why compounding works, and checking investments frequently is a bad idea. Think of compounding like making a snowman. You start with a small piece of snow. Roll it, and it gets bigger. Keep rolling and it gets bigger; the bigger it gets, the easier it is to acquire more snow. Soon you have a snowman. Compounding is the key feature of investing, and it's why time is the critical factor.

Some examples of compounding at work* (6). They aren't at all guarantees, only simple examples:

And so on... Another fact about compounding: the sooner you start, the more you can make. In your 20s is ideal. Thirties, still very good. Forties, good still. Fifties, pretty good. Sixties, still very much worth it. I don't see a problem with starting investing at any time, though it's widely agreed that the younger you are the better, so you can tolerate more risk. That way, time has longer to smooth out the investments, and compound gains. Also there is no "right time" to invest. It's like saying there is a "right time" to ask somebody out, apply for a new job, or go on holiday. Just do it - and feel alive! (but, as the banks say: do your own research because your capital is at risk).

*These calculations were made at https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator and assume a certain interest rate (4% here). Interests rates themselves are variable; sometimes they are high, sometimes they are low. Time tends to smooth these numbers out. Investment calculators are fun to play with; there are lots of variations on different websites. Give them a try.

#5. Index fund awareness: simple, easy, grounded in evidence

As mentioned above, an index is a group of companies, and an index fund is the ability to "buy into" lots of different companies at the same time (1). This spreads the risk and helps the upside. All of our eggs are not in one basket; they are in multiple baskets around the world all at the same time. Index funds generally follow what a list of companies does, so there is no expert management involved. Generally a computer does it. And computers have been managing index funds for around 50 years; they've got a good track record. It's expected that the list of companies performance will balance out, and the investor will feel the returns on their initial investment. Because of this simplicity, index funds are very easy to use, and cheap to be a part of.

#6. Simple investment advice from one the top investors in the world, Warren Buffet (4)

1) Buy an index fund.

2) Hold it long term.

#7. Where to invest, how, and where to find more useful information

Vanguard is an online website that permits investing. Back in the 1970s, they pioneered the index fund through John Bogle, who believed that financial experts could be beaten by computers - if the computers just invest in a group of companies. Well, can they? The data are in: they can (there's been studies, 1). And they do so at a much cheaper cost - and less risk. Interestingly, psychological experiments show that people involved with expert financial decision making are much more confident than their results would suggest (3, 7). So, go with Vanguard. Investing as described here is not trading - you do not need to check in on your investments every hour, every day, or even every month. Every 6 months to a year will do. Partly because of this, Vanguard does not have an app. You'll have to use their website, which makes it that little bit harder to check your investments, and negatively react to short-term market events. Videos do a very good job of explaining all of this stuff, how it works, and why you should do it (4, 8):

Concluding remarks

Investment is easy to begin. You don't need much money; you don't need to know much about finance or how markets work. All you need is an rough interest in money, how to get more of it, and to watch some YouTube videos. Index funds simplify things, creating more upside and less downside. They spread investment and often beat overconfident finance people. Investors should generally ignore short-term shocks and discussions on the news about "the economy" (today it's doing well, tomorrow it's not so well, etc, 5); instead investors should keep topping up investment accounts and benefit from long-term compounding. Don't withdraw. Just add, and forget about it.

To some extent, investment puts power in the hands of the individual investor. Each investment directly supports people in the real-world. This can be weapon manufacture or the production of vegetarian sausages. By putting your money towards one you indirectly punish the other (what economists call opportunity cost). Businesses cannot operate without investment, and people can choose where to put their money. Overall, investment gives people a say in how the world is run, no matter who they are or where they are from (assuming they can open an investment account). Investment also rewards collective effort towards particular goals. Index funds exist for financing green technologies, for example. Investing is well worth being a part of - ethically and financially.

So, what will you invest in? Weapons production or vegetarian sausages?

References (definitely do your own research)

1) Sethi's I will teach you to be rich (2019). Very good and accessible book on the subject. Easy reading, informative. A bit harsh sometimes. Highly recommend.

2) Harari's Sapiens (2014). Discusses history of investment and companies briefly.

3) Kahneman's Thinking fast and slow (2011). Discusses lots of psychological experiemnts to do with finance, and how people overestimate theior ability to "pick the right" stocks. Most people can't.

4) Damien Talks Money, Investing for beginners UK 2023, https://www.youtube.com/watch?v=yG5plUMBtzQ&ab_channel=DamienTalksMoney Discusses basics of investing; very good information.

5) Taleb's Antifragile (2012). Discusses ideas about how financial systems needs shake ups in order to grow. Market crashes, in other words, are useful in the long term. And therefore good for investors.

6) Investment calculator, accessed at: https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator There are many other options for websites that do this.

7) Taleb's The black swan (2007). Discusses the financial crash and associated concepts. Taleb advises people not to watch the news.

8) Damien Talks Money, Vanguard UK. How to use Vanguard https://www.youtube.com/watch?v=ny5OxhRDGGo&t=729s&ab_channel=DamienTalksMoney Another good explanation about Vanguard and how it works.