Investing For The Long-term (Retirement)
We’re going to cover all about investing in the stock market for the long-term in the following steps. We’ll:
- Define our investment approach. ← We are here
- Learn how to assess investment vehicles and choose the best for us. I call an “investment vehicle” a specific framework under which you can invest your money. The framework is defined in general terms by who manages your investment (you or an investment manager), the costs of investing, and tax implications.
- Pick the assets we’ll buy under the chosen investment vehicle.
- Pick our broker. The broker is the intermediary between you and the stock exchange.
We’ll end with a few important considerations on how to start investing. Should you move your accumulated savings into the stock market in one go or should you ease your entrance through time? What should you do in a market crash?
Let’s begin then.
Our Investment Approach
3 min read.
Many people become hesitant when considering investing in the stock market. We all know that investors often lose a lot in the stock market very quickly. Particularly now, with so much uncertainty due to the Coronavirus’ impact on the economy, investing in the stock market may seem unwise. Who knows where the market is going in the next months? Will it recover its losses? Will it plummet further?
However, our investment approach is such that it’s almost irrelevant how the market is when we start to invest. It’s more important that we start to invest at an early age. This is because we’re investing in the loooong-run. We’re not trying to time the market to buy low and sell high and get a quick profit from it. We’re trying to invest in value that will grow over 30 years, meaning investing in assets that will become more valuable in the long-run.
And how exactly do you pick those assets? Can you predict which companies will still be alive and well 30 years hence? Can you even foresee which industries will grow and be created, and which will contract and disappear? I don’t think anyone can with a high degree of fidelity.
Investing is not about picking stocks. You cannot reliably pick stocks that will outperform the market over the long term. It’s way too easy to make mistakes such as being overconfident about choices or panicking when your investments drop even a little.
—Ramit Sethi, I Will Teach You To Be Rich
So instead of picking and choosing, we’ll invest in the market as a whole. We’ll put our money in the idea that, in 30 years, the World’s economy will be bigger than it is today. In the idea that, over that time, the World’s population will grow, more people will connect themselves to the global economy, technology will evolve, standards will rise, each individual’s and each company’s opportunities to create wealth will be greater than they are today, etc, etc, etc…
We’ll invest in the market as a whole by buying and holding assets across several asset classes – stocks, bonds, REITs and cash – so that we have an asset allocation that minimizes risk while generating good returns, and we’ll also diversify within each asset class so that we’re not too exposed to what happens to each particular company or State we invest in (more on this later).
Don’t worry, we don’t have to buy tons of stocks and bonds and the other assets to invest in the general market. There are instruments, call investment funds, that consist of an aggregation of these individual assets. Therefore, owning shares of an investment fund equals, to a slight margin of error (more on this later), owning the assets the fund invests in. These funds make our job easier and cheaper, so they are the assets that we’ll buy and hold.