Investing 101 – Part 1: Introduction

The world of finance and investing can seem very intimidating to beginners.  Personally, I didn’t have a clue as to how to invest or what to invest in when I received my first big girl paycheck.  I still am no expert, so take what we offer with a grain of salt, but we’ve decided to launch a series on investing basics.  We decided to break things up to try and hold your attention and not bombard you with too many terms all at once.

Hopefully by the end of this series you will feel more comfortable with investing terminology and be comfortable enough to take the plunge to create an investment account if you don’t already have one open. Once your accounts are opened, you can set everything up to automatically fund your accounts on a monthly or bi-weekly basis so it’s on autopilot set it and forget it mode.

Disclaimer: The information provided on this blog are simply our recommendations.  There is no guarantee the way that we invest our money is the right fit for you and there is also no guarantee you will make money investing in the stock market. 

Historically, the stock market has grown 10% on average over the last 100 years but any wise investor knows that past performance does not indicate future returns.  For example, if there’s an alien apocalypse, we’re all screwed. Personally, I have faith in the stock market for the foreseeable future and will continue to invest in the broad stock market index over the course of my life. 

Does that mean you need to as well?  Absolutely not.  You do you and do what you feel comfortable with.  Just realize that stashing your cash under a mattress or in a checking or savings account with a big bank earning 0.03% interest will become less valuable with inflation. 

Does this mean all stocks are winners?  Absolutely not.  Some stocks will soar and some will fizzle out.  This is why we invest in the overall US stock market index fund to ensure we do not have all our eggs in one basket.  Some of those stocks will fizzle their way down to nothing and will no longer be in the game.  Other stocks however could grow by 100%, 200%, 300%, 500%, 1000%, etc.  The downside is -100% but the upside is infinite.  That’s the beauty of the market.  

Over the last 40 years, the annualized return (dividend reinvested) of the S&P 500 was 9.028% when you account for inflation.  I played around with this fun little S&P 500 Periodic Investment Calculator, and if you invested $10,000 back in October 1979 (40 years ago) and didn’t touch that money again or add another penny into your investment portfolio, 40 years later you would have $789,439 in your account.  That’s a 78x return!  And that accounts for numerous dips in the market over that 40-year time frame.  Yes, there is inflation you need to factor in but that is still a pretty wild statistic.  The key is to not get scared and pull out when there is a dip.  Set it and forget it.  Or better yet, keep pouring money in, especially when there is a drop as that is when you will pick up shares when they are on SALE.  The media portrays these market dips as doom and gloom events which typically spooks people to sell their investments.  As a LONG term investor, the exact opposite it true. This is when you want to BUY. Most people see a market drop and panic and pull out thinking the end is near, but unless that alien apocalypse is happening, there is a very good chance that the market will climb upwards months or years after a market correction.  This is when you want to be pouring as much as possible into the market.     

Sure over the next 40 years there will probably be more of the bad news and the media will bombard us with all of the “world is on fire” headlines to boost their ratings when in reality it’s mostly nonsense.  There’s definitely going to be more companies being profitable and growing.  Don’t be sad you missed out on this 78x return from the past 40 years.  Get in on the next 40 years.  You know how the saying goes “the best time to invest in the market was 20 years ago, the second best time is now”.  

While I am nervous about a market correction happening soon, I know that humans truly are amazing.  The ingenuity and ideas that people come up with to further change and improve our world is insane.  Think of all the advances in the medical field over the last 500 years.  Or all the recent changes in technology over the last 50 years.  Imagine what’s to come over the next 100 years?  Does anyone else think there will be new technology to have a second civilization on another planet in the near future? 

Let me preface this series by noting that investing is not meant to be a get rich quick solution to all of life’s worries.  If you are looking for the next best individual stock pick or the next best investment opportunity like crypto (please do not invest in crypto), you’ve some to the wrong place.  You also don’t have to put your money in the hands of financial professionals who will charge you a hefty fee for their services.  A 2% management fee may not sound like a lot when you’re thinking of it on a scale of 100%. But that’s not how it works. If your investments average say 6% returns (as managed fees typically do not outperform the market) then that 2% management fee is really 33.33% of your returns (2/6) which is HUGE. And then you lose the compound interest opportunities of that 33.33% too! You are the best judge to determine what is best for you and your money.  It requires reading and research from your end.

The easiest way to define “investing” is: putting your money to work for you.  Here’s a great Economics 101 primer for my non-econ and math nerds reading.  Making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime, or look for a higher-paying job. There are many accounts you can open to invest your money and we will cover these in another post.  There are many ways to invest your money such as stocks, bonds, mutual funds, real estate, starting a business, etc.  Again, these will be covered in a future post as part of the Investing 101 series. There are pros and cons to all of these which we will cover later.  

Investing involves risk, and there are no guarantees, but it always requires some analysis on your part rather than crossing your fingers and hoping for the best.  Figure out what type of investor you are.  For example, we held on to our real estate property in Florida while we lived in Western Canada and learned that we do not like being involved in real estate from such a far distance and we would rather focus on investing in the stock market instead.  You may feel the exact opposite and that’s ok too.  Again, what we are doing is not a cookie cutter recipe for everyone to follow.

Many people want to invest their money but just not sure where to start.  The idea of working for the same company for years and retiring with a nice pension are pretty much gone.  Unfortunately, the ability to retire is falling more and more on the responsibility of the individual rather than the state.  Who knows what Social Security or CPP will look like 30 years from now?  Hopefully it will still be there in some sense, but I’m not solely relying on it for my retirement income. 

Investing your money can allow you to increase your personal freedom, sense of security, and ability to retire early.  Put yourself in the driver seat of your future.  With every paycheck you receive, you should be paying your future self first by saving and investing part of your income. 

You know what you call someone who spends everything that they earn?  Broke.  Don’t be broke.  You simply cannot get ahead if you’re constantly resetting yourself back to zero by spending every dollar you make.  Or even worse, spending more than every dollar you make by borrowing money and then having to pay it back with interest.  Set up a system where before you can spend money on anything you invest in your own future.

The larger the percentage that you can crank into your investing portion, the faster you can build wealth and retire early (if that’s your goal).  Common advice in the financial world is to save 10% of your income.  That equates to roughly 41 years until you can retire.  For someone starting out in their early/mid 20s, that means a retirement date in your early/mid 60s.  However, if you can save 60% of your income, it will only take about 11 years for you to have enough invested to never have to work again.  If that’s too aggressive, saving 50% of your income will take you about 15 years to reach your retirement goal.  If it shifts down to 0%, you’ll never be able to quit. 

The math is pretty simple yet it’s so hard for people to fathom how it’s possible.  It is. We are proof that it works.  Reduce your expenses.  Boost your income.  Invest the difference. Your future self will be so proud of you.  Let those little hard earned pennies make money for you while you sleep. I like to think of them as little minions under your empire.

In the next section of the Investing 101 Series we will learn about one of mathematical miracles that investing lets you take advantage of: compounding interest.

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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.  Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:

• How much are you paying for your phone plan?  Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
• How much are you paying for internet?  Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
• How much are you paying for home insurance?  We were able to reduce our rates by 25% by switching over to Square One Insurance.  If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance.  Use this link to receive an extra $15 off your quote.  (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
• How much are you paying for your monthly utility bills?  See how you can likely save on this monthly expense.

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