For what, why, when, how to and in what?
#1 We save and invest to pursue objectives: retirement, emergency fund, buy a house, children college tuition, capital to start own business, healthcare and managed care expenses, bequest, etc.
#2 We need to invest in financial assets because hard work income and savings returns aren´t enough
#3 We must diversify our investments and make a capital allocation or distribution by the two main asset classes – stocks and bonds – bearing in mind the objectives term, the financial situation and capacity, and our personal risk tolerance, because that allocation determines more than 90% of the performance
#4 We have to diversify within main asset classes by their main subclasses (by geography, industries our sectors, companies and risk profile), to improve expected returns and risks
#5 We should select index and low-cost investments representatives of the asset subclasses, as they provide a better diversification and significant expenses savings, to capture the most capital appreciation
This is an A to Z guide: simple, easy and practical. It is within everyone’s reach. Its purpose is to improve our financial life. It takes on a global world approach, graphical and actual. It goes through several countries, regions and continents. It includes both advanced and emerging economies.
In the world we live in we have already left 1.0, 2.0 and we talk about 3.0 or even more. However, in many situations it seems that we are still in the Stone Age in terms of personal finance, wealth management and investments.
This is why we felt it necessary and important to make a 0.0 guide on the basic principles of investment. Basic, however, does not mean less effective, it simply means easier to understand and adopt. Putting a little effort into understanding personal finance, wealth management and investments can make a big difference in our lives.
#1 We save and invest to pursue objectives: retirement, emergency fund, buy a house, children college tuition, capital to start own business, healthcare and managed care expenses, bequest, etc.
First of all we must set up our financial goals. After all, we invest to achieve goals, fulfil needs and interests.
The main and most common objectives are: emergency funds or safety nets to cover unexpected expenses (car repair, purchase of new appliances, health care, temporary unemployment, divorce, etc.), retirement funds, general planned expenses (dream vacation, purchase or renovation of the house, college tuition for children, marriage, start of own business, etc.), senior living managed care, inheritance or bequest, etc.
https://news.gallup.com/poll/349241/americans-confidence-finances-mostly-recovered.aspx
https://www.thetimes.co.uk/money-mentor/article/top-financial-goals/
Each person or household is in a unique situation, so the financial plan must be personalised to start with their objectives. However, personal objectives must be realistic and achievable, and this requires assessing the starting financial position and projecting future income generation capacity.
#2 We need to invest in financial assets because hard work income and savings returns aren´t enough
Secondly, we know that hard work is not enough because the capital we need is greater than the income we get from our employment.
History tells us that we also cannot live only with term deposits and savings accounts because usually the interest does not even cover the loss of purchasing power (do not earn enough). That’s why we need to invest in financial assets, that is, in stocks and bonds.
These assets have a better return but also greater risk. However, the risk decreases with the investment horizon, and we are able to manage risk to maximize gains and reduce losses. We must invest in risky assets to avoid risking our lives.
Thus, we should make savings (putting money aside) to cover for two years of living expenses, and investing (make money grow) to fulfil our objectives with a two-year or more term.
#3 We must diversify our investments and make a capital allocation or distribution by the two main asset classes – stocks and bonds – bearing in mind the objectives term, the financial situation and capacity, and our personal risk tolerance, because that allocation determines more than 90% of the performance
Thirdly, we must invest in a diversified way or don’t put all the eggs in the same basket. Invest in a mix of stocks and bonds markets. In accordance with our objectives, target dates and risk tolerance.
The main determinant of investment performance is the allocation by asset classes. The way we allocate our wealth or investment portfolio to stocks and bonds, accounts for more than 90% of the final result.
Stocks are appreciation or income growth, bonds are preservation or income stability and cash is a refuge or cushion. Stocks are for the medium and short term, bonds are for the short and medium term, and cash is for the immediate and very short term.
#4 We have to diversify within main asset classes by their main subclasses (by geography, industries our sectors, companies and risk profile), to improve expected returns and risks
Then we must deepen diversification, starting from the classes of financial assets to the main respective subclasses, in order to further improve the relationship between profitability and risk. Within stocks, the main subclasses are the geography and size of the companies. In bonds, the main subclasses are the geography, type and the credit quality of issuers.
In addition, it’s risky to invest in a single security or even in a small set of securities. We may have the good fortune of having invested in Microsoft or Altria, or the bad luck of investing in Enron, Wordcom or Lehman Brothers.
#5 We should select index and low-cost investments representatives of the asset subclasses, as they provide a better diversification and significant expenses savings, to capture the most capital appreciation
Finally we have to decide on the selection of investments. These must be representative of the chosen asset classes, well diversified and low cost.
As we have seen, it is best to invest in a wide range of subclasses of stocks and bonds. For we dilute the concentration risk. Indexation or investing in mutual index funds and similar securities that make investments in the hundreds or even thousands major stocks and bonds belonging to a specific asset subclass are the solution.
How to choose the most suitable investments? In the short term the evolution of the financial markets is uncertain. Fees and other commissions’ costs are certain, and in the long run, by the compounding effect, they represent a significant portion of value extraction that can be more than 50% of the capital appreciation in the long term! Diversified, low-cost investments are the best.
So we come to the conclusion to invest in passive management, in the best index mutual funds, ETFs (“Exchange Traded Funds”) or similar securities. It is not by chance that these investment products are the ones that have had the greatest growth in recent years.
If we plan our objectives well and implement the appropriate strategies, the probability of success increases considerably. In personal finance as in everything in life, goal planning and strategy implementation are more than 99% of the final outcome.
In this Blog we will develop an A to Z on the themes of good investment. This will be in plain English and accessible to all. We will be taking a practical ‘ how to’ approach, keeping words and technical jargon to a minimum, our concern is to show people how to make, take and above all implement sensible investment decisions.
We will comprehensively cover to whole process, from the implementation of the initial investment plan to its monitoring, review and control and results.
We want to build a complete and practical guide to personal investing and wealth management, one that is accessible and empowering to ordinary people who want to plan for their financial future. This is the challenge we have set ourselves here!
A final note: this Blog is intended not only for Portuguese citizens, but also people of all nationalities. Whenever possible, we will give priority to a comprehensive overview of the global markets and investments, and the most current possible.
We want to cover all the continents, geographies and countries. Showing the advanced economies as well as developing, or emerging economies. However, often we will have to turn to the USA example, because in many cases we will address, there is only data, analyses and studies for this country.
Sometimes we show data with a few years already, because we haven’t found better current information.
Finally, almost all the graphs and charts were not made by us, but on the contrary, were imported from oter sources that are duly mentioned; the reason is very simple: we believe that it we couldn’t to do it better.
Nevertheless, we believe that this perspective is not reductive. On the contrary, is broad and comprehensive, because we know that these data applies in general to all countries and all times.
