03. The basic rules of investing
As in many other areas of life, investing well has an important part of avoiding mistakes. If we are prudent, we can have disagreements, but it is rare that we lose even the shirt. What is difficult is to get rich by investing. But everything will be done, we are still starting. Therefore, it is important to have clear basic rules, which will save you scares and – most importantly – allow you to make informed decisions.
We have already told you that the first requirement to start investing is to have saved, to have your financial house in order. From there, decisions depend on the profile of each investor and the risk we want to assume. And risk is closely linked, in turn, to the moment of life in which we find ourselves. Surely we will not want to invest in the same way if we are thinking of buying a flat or if we want to strengthen our retirement …
In any case, the general recommendations aim to save around 10% of your salary. And invest about 10 or 15% of the income. This percentage could be increased to 30 or 40% depending on what we mentioned: the vital moment and the aversion to risk of each one. Of course, the basic rules of investment are applicable to all investors. Here they go:
Start early
Do not leave for tomorrow what you can do today also applies to investment. In fact, if you have not started you are still in luck, because it is always the best time. Unless your goal is to obtain returns in a short time. For most investors, it’s never too late, because, in the long run, the market always grows. And because profitability, no matter how small, multiplies your savings over time.
We have already told you about compound interest. At first, interest makes your investment grow a little bit, but then that interest is applied to that total a little bigger. Consequently, the growth of your savings is not arithmetic, but geometric. To give you an idea: imagine that you put 1,000 euros in a piggy bank and that every month you add 30 euros. After 20 years, you will have 8,200 euros. If instead of the piggy bank you had chosen a deposit at 2%, in the year 20 you would have 10,400 euros. After 30, it would be 16,700…
Think long-term
The economy has its cycles. Normally, if it’s been growing for a long time, there will come a time when it stops and goes into recession – well, unless you live in Australia. That affects the valuation of assets – what you can invest in – although its effect is not uniform. In addition, complications may arise in one sector, but not in others. In short, it is difficult to beat the market: predict what will happen to take advantage.
What doesn’t change is that the market, like the economy, always grows in the long run. Hence, it is never too late to start investing – without getting carried away by euphoria or the decisions of other investors. As Warren Buffett said: “To make money investing you have to buy good companies and keep them for long periods of time.” Of course, the first part is easier when you’re Warren Buffett…
Diversifies
Ray Dalio, founder of hedge fund Bridgewater Associates and considered one of the most influential people in the world, says diversification is the “holy grail” of investing. The key to success is simple: “Find 15 or 20 good sources of income that are not correlated with each other.” Again, the experience of being Ray Dalio counts for a lot.
But the idea is clear. If we invest in different assets, different sectors, different countries or different times, we will dilute the risk. Urbanitae’s proposal has diversification at its base: starting from small amounts, it allows investing in a plurality of independent projects and diversifying by type of asset and location.
Make sure you understand
Even the most classic investment options deserve close examination. If you have doubts between the NIR and the APR, you do not know what a coupon bond is or what difference there is between gross and net profitability, ask before deciding. And make sure you invest in something whose operation you can understand. Part of the disaster that occurred in the Great Recession – the global crisis that originated in 2007 – is that many invested in products – derivatives – such as CDS or CDOs, difficult to unravel.
In short. Don’t roll the blanket over your head or make hasty decisions. And choose investments that you can explain to your parents… or that you can touch.