The Beginner’s Guide to Becoming a Badass Investor

Getting rich with investing - an animated guide.


If you’ve hitched your wagon to the Deep Dish caravan, you’ve got a big problem on your hands right now.

A bunch of small but powerful lifestyle tweaks have unleashed a tsunami of savings and filled your pockets with cash, to the point where you have to employ two burly men just to hold your pants up.

What to do with all that lovely money? The mattress is already stuffed to burst, and the bank’s interest rate is sadder than a teenager with a broken selfie stick.

Let’s consult the the formula for financial freedom:

Live on less than you earn. Save and invest the difference, and let compound interest do its thing.

It’s time to wrap our brains around the investing side of the equation, because the payoff is huge. Check out what happens if you start investing from age 25:

 

Animation: What would happen if you invested a third of an average income?

 

Like what you see? Let’s walk through the most important factors, then finish up with a recommendation for getting your feet wet.

Risk tolerance

As the graphic above shows, it’s crucial to take on some risk rather than let your money stagnate in the bank. The question is, how much? Everyone has a different tolerance for risk.

At one end of the spectrum you’ll find nervous Nellies pulling on a hazmat suit before they venture out of their security compound to check the mail. At the opposite end, you’ve got the sort of daredevils who sprinkle amphetamines on their cornflakes before a big day of free climbing, wrestling bears, and unprotected sex with strangers.

Most of us fall somewhere in the middle, but it’s important to figure out where. If you take on more investing risk than you’re comfortable with, stomach ulcers and sleepless nights will become your constant companion, and you’re much more likely to make bad decisions.

When markets fall, people panic and sell out with the worst possible timing. Not only do they take a haircut, they miss out on all the sweet, sweet gains during the inevitable recovery. Check out what happened to the unfortunate souls who cacked their pants during the last market downturn:

 

Animation: What makes risk tolerance so important?

 

Investment timeframe

Markets move up and down in cycles. Investing will almost certainly make you rich in the long run, but over shorter time periods it’s anyone’s guess.

Let’s say you have a five-year plan to put a deposit on a house, start a business, or go travelling. If you get lucky, the market will be peaking when you come to cash out your investments. If you’re unlucky and it’s in a trough, you’ll be caught with your pants down.

That means you have to match your investment choice to your timeframe. If you’re saving for a short-term goal, term deposits, bonds and other ‘fixed-interest’ investments are probably the way to go. The rewards are lower, but so is the volatility.

Riskier investments like shares and property are more suited for people with longer investing timeframes. When you’re in it for the long haul, you can safely ride out all the bumps without worrying about having to lock in a loss.

 

Animation: Why does your investing timeframe matter?

 

Diversification

Investments can and will collapse, sometimes without warning. When they do, you want to feel as little pain as possible.

The best way to do this is to enthusiastically spread yourself around town like a 1960s flower child. When one of your lovers abandons you, plenty of others will be there to soothe your broken heart.

This principle is called diversification. It involves divvying up your investments between as many stocks, industries, and locations as possible. If any one company ends up in the poo, it won’t be ruinous to your finances.

This is one of several reasons why I haven’t invested in property (and don’t intend to). It ties your fortunes to one or a few assets, all exposed to the same economy and housing market.

(Of course, the rewards can make it worthwhile. A friend became a millionaire at age 24 by riding the property boom in my home city of Auckland. This is more risk than I’m personally comfortable with, which comes back to the first principle of risk tolerance.)

Diversification can be tough for the little guy. Someone with a million bucks can put $10,000 into 100 different companies, and pay for expert advice on the best way to do it. If you only have a few grand, you’re kind of screwed. Luckily there’s a way around this conundrum, which we’ll get to shortly.

 

Animation: What's with all the fuss about diversification?

 

Leverage

Property investment can mint millionaires in their 20s because it uses the power of leverage. That means investing not just your own savings, but money you’ve borrowed from someone else.

Lots of people buy their first home with a 20 per cent down payment, and get the rest from the bank. They’ve borrowed $4 for every $1 they put down, which means their return on investment will be multiplied by 400 per cent if house prices increase.

Of course, it cuts both ways – any losses are also amplified several times over, which is how people end up completely underwater when housing markets slump.

Leverage is normal when buying property, but much less common for other types of investment. Again, the choice of whether to use it comes down to your personal risk tolerance.

 

Animation: How the devil does leverage work?

 

Timing

Investment gurus love to tell people to ‘buy low, sell high’. No shit, Sherlock. Unfortunately, timing the market is impossible without psychic powers, and anyone who tells you otherwise is either delusional or trying to sell you something.

If you invest a big lump sum all at once, your timing might be perfect, but it could equally well be disastrous. The best strategy is to invest steadily over time, paying no attention to the ups and downs. Drip-feeding cash in every month helps to spread your risk over different time periods.

If you can completely take yourself out of the equation by making the drip-feed automatic, so much the better. That will protect you from your own greed and fear, both of which lead to terrible decision-making.

 

Animation: How to time the market like a boss

 

Expenses

Stopping every other bastard from skimming the cream off your hard-earned returns is one of the biggest factors in investing success.

Transaction fees will gobble up plenty of your cash if you’re not careful. Brokers – the people who buy and sell investments on your behalf – clip the ticket on every transaction, which means constantly buying and selling stocks is expensive.

Trading is for chumps anyway. While you think you’re making a genius move, the person on the other side of the trade has an equal and opposite opinion. Only one of you can be right. Don’t feel bad, because the exact same conundrum applies to so-called professionals. Fund managers charge exorbitant fees to pick hot stocks on your behalf, but there’s zero evidence that any of them can consistently beat the average market return (most struggle to even match it). To put it bluntly, they’re no better than monkeys throwing poop at the business section of the newspaper.

Not convinced? This topic is really important and the psychology behind it is kind of fascinating, so I’ll write a dedicated post on it soon.

UPDATE: Here it is folks! How a Billionaire Fund Manager Taught Me to Invest Using the Force

 

Animation: How can a few sneaky fees make or break investing success?

 

Barriers to entry

As an investing noob, some options are automatically out of your reach. Getting started in property usually requires a big chunk of change to begin with, and if you buy stocks individually it’s difficult to get enough diversification.

Thankfully, there’s a great option for all of us little fish. By pooling your piddly amount of cash with my piddly amount of cash and Jimmy’s piddly amount of cash, we can band together and become very strong indeed. Collectively we can buy tens of thousands of companies, and own a tiny slice of each.

This type of investment is called a mutual fund. There are thousands of funds to choose from, and many have basically no barriers to entry. You can get started with $500 (sometimes less), and build from there.

 

Animation: What is a mutual fund, and how does it work?

 

Recommendation

Obligatory disclaimer: This blog post is meant for educational and entertainment purposes only. Any resemblance to a real financial adviser, living or dead, is purely coincidental. Do not read while operating a motor vehicle or heavy equipment.

Finally, we get to the good bit! Seriously though, you better not have skipped ahead to this part because all the other stuff is really important (plus it took me ages to write).

The one type of investment that’s especially well-suited to beginning investors is (drumroll please) …a passively managed mutual fund.

Wait a second – didn’t I trash fund managers, calling them no better than poop-flinging monkeys?

Yes, yes I did. All fund managers are monkeys, but some of them have the good grace to acknowledge their simian shortcomings. Passive fund managers don’t muck around trying to time the market or pick hot stocks, and they don’t take outrageous performance bonuses either. Instead, all they do is match an entire market or stock index, then put their feet up and take the afternoon off.

Passive funds tick all the boxes: Enormous diversification, different levels of risk to match your preferences, rock-bottom fees, low barriers to entry, and the ability to set up an automatic drip-feed. The biggest and best known are the likes of Vanguard and iShares, which are US based. Vanguard is an absolute monster non-profit with $3.6 trillion of assets under management, which gives it huge economies of scale.

Vanguard’s Total Stock Market Index fund invests your money across every single listed company in the United States – all 3613 of them. That diversification comes with a management fee of just 0.05 per cent, which is literally 20 times cheaper than a typical actively managed fund.

If you’re outside the US there can be a few complications in investing directly. If that’s the case, you can always find a middleman in your country who can channel you into the big funds.

(For New Zealanders: Check out Superlife or Smartshares, or Simplicity for your retirement savings.)

Robo-advisors like Betterment and Wealthfront also act as a front-end for passive funds, and are starting to really take off. They may offer some slight advantages over the direct investment route, which I’ll get into in another post.

Confession time

I’ve been championing passive investing for years, but in my wayward youth I wasn’t smart enough to take my own advice. Instead I bought individual stocks, mostly because it was fun and I liked to think I was a special snowflake.

I did pretty well (more than 10 per cent a year, which beats the hell out of the bank) but still left some money on the table. If I hadn’t tried to be clever, I would have hit my $100k goal faster, and my net worth would be higher. I also made one really dumb mistake, which I’ll explain in a future post so you guys don’t fall into the same trap.

UPDATE: Check it out – The Worst Investment Ever: How I Lost $10,000 Catching a Falling Knife

Where to from here?

Great news for lazy people! Investing can be as simple as finding a low-cost fund that matches your risk profile, setting up regular payments, and forgetting about it for a few decades.

If you choose to go down one of the other pathways, you’ll need to do anywhere from a little more homework to a fairly enormous amount of research and training.

To anyone for whom this article was old hat, I’ve got an advanced investing post in the pipeline just for you. For everyone else, I strongly recommend dipping your toes with some basic investment strategies before you dive in the deep end.

One last step: After you make your first investment, you’ll want to go and get yourself a top hat and monocle. Congratulations! You’re officially one of those dastardly capitalist barons making a dollar off the back of the hard-working masses.

Jimmy and sons salute you.
Now get out there and oppress some peasants.

Recommended reading:

I’ve written heaps of investing articles for the mainstream media over the years. Here are a few which might be useful:

Any questions? Something I haven’t explained clearly enough? Shout out in the comments below!

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2 Comments on "The Beginner’s Guide to Becoming a Badass Investor"

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Stephen
Stephen

Do you have any thoughts on how one should decide to stop focusing on paying off debt (either good or bad) and starting this kind of investing? I’ve heard the ‘invest in index funds ASAP’ idea many times but never seems to take into account the reality of say, a mortgage or student loans, so would be interested in your take on it.

Richard Meadows
Richard Meadows

Hey Stephen, as a general rule I prefer repaying debt to investing, in that it gives you a guaranteed, tax-free return.
Of course, there’s always an opportunity cost – could you increase your net worth more by investing instead? The choice comes down to two factors: How much interest you’re paying on the debt, and what your tolerance for risk is.
For something like credit card debt, it’s screamingly obvious that you should pay that off before you invest a solitary cent. For low-interest mortgage debt, it’s not such an obvious choice.
Some people prefer to clear the mortgage entirely before they begin investing. At the other end of the spectrum, a risk-taker might go interest-only on the mortgage and invest the whole lot (which is essentially what serial property investors do).
There’s a middle-ground option too: I’d probably be comfortable channelling around half my savings into repaying the mortgage (depending on the interest rate), and the other half into an index fund. Basically, there’s no hard-and-fast rule.
For a longer explanation, check out this article. Hope that helps somewhat!

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