Investing in Stocks

Jul 19, 2024

Lecture Notes: Investing in Stocks

Introduction

  • Speaker: Presenter discussing father's hard work and experience with inflation.
  • Backdrop: Father saved money in banks with low interest rates, resulting in losing value due to inflation.
  • Presenter's Strategy: Presented his investment success with stocks gaining around $17,000 a week.
  • Objective: Providing guidance on investing, based on personal experiences.

Key Concepts

Inflation and Savings

  • Inflation Impact: Money loses value over time as more currency is printed.
  • Saving Pitfall: Savings accounts with low interest rates do not beat the inflation rate of 3.8%.

Importance of Investing

  • Investment Return: Stocks can potentially provide returns of 8-10% annually.
  • Types of Stock Returns:
    1. Increase in stock price.
    2. Dividends from profitable companies.
  • Compound Interest: Reinvesting returns accelerates wealth growth over time.

Compound Interest Calculation

  • Example: Investing $250/month at 8% return can make you a millionaire in 42 years.
  • Time Impact: More investment time increases compound interest benefits.

Strategies for Investing

When to Start Investing

  • Early Start: The younger you start, the more time for growth and compound interest.
  • Risk Management: Younger investors can take more risks as the market recovers over time.

Steps Before Investing

  1. Pay High-Interest Debts: Clear debts like credit card dues first.
  2. Build Emergency Fund: Save enough to cover 3-6 months of living expenses.

Investment Accounts

  • Custodial Accounts: For investors under 18 with parental management.
  • Special Accounts: Roth IRA (USA), Stocks & Shares ISA (UK), TFSA (Canada), Supers (Australia).

How Much to Invest

  • Personal Comfort: Invest what you feel comfortable with.
  • 70-20-10 Rule:
    • 70% for living expenses.
    • 20% for investments.
    • 10% for fun and leisure.

Practical Investing

Choosing Stocks

  • Platforms: Various apps available, e.g., Trading 212.
  • Account Types: Important to choose right account to avoid taxes.
  • Fractional Shares: Investing in part shares allows for flexibility.

Analysis Methods

  • Technical vs. Fundamental Analysis:
    • Technical: Focuses on charts and patterns, used by day traders.
    • Fundamental: Focuses on company financials and leadership, preferred for long-term investments.

Index Funds

  • Definition: Investment in many companies at once.
  • S&P 500: Examples include Amazon, Google, Apple, Tesla.
  • Advantages: Diversification, reduced risk.
  • Historical Returns: 13.6% average return over 10 years.
  • Low Fees: Passively managed with low fees, e.g., 0.02% per year.

Types of Index Funds

  1. S&P 500 Index Funds: Tracks 500 largest companies in the USA. Examples: V5x Index Fund, VU ETF (USA), V USA ETF (UK).
  2. Total Stock Market Index Funds: Covers entire stock market. Examples: VT sax index fund, VTI ETF (USA), vwrl ETF (UK).
  3. Emerging Markets Index Funds: Focus on growing markets. Examples: v-e-i-e-x ETF (USA), vfem ETF (UK).

Investment Risks and Strategy

  • Diversification: Important to reduce risk.
  • Timing: Continue investments regularly to withstand market crashes.
  • Bonds: Consider bonds for stability as you near retirement.

When to Sell

  1. Emergency Need: Only if necessary.
  2. Bad Investment: If consistently underperforming.
  3. Achieving Goals: For specific financial targets.

Conclusion

  • Key Message: Start investing early and consistently.
  • Strategy: Focus on long-term growth through diversification and compound interest.
  • Resource: Utilize apps like Trading 212 for practice and fractional shares.