Investing for Anyone
A low-stress and effective way to invest your savings.
Disclaimer: This post is for informational purposes only and not financial advice. Consult a financial advisor before making investment decisions. Investing involves risks.
How should I invest my savings?
In this blog post, I outline a popular approach to achieve an expected yearly growth of ~7% (before inflation) over the long term.
Why should I listen to you?
After completing my PhD in computer science at the University of Cambridge, I worked at various software companies, as well as a London hedge fund. This article is based on my research and personal experience with investments. That said, I don’t think you should trust anyone with your investment strategy: do your own research.
I now believe that most people only need to read one book on the topic: Smarter Investing by Tim Hale. (Note that I didn’t share an affiliate link - I have no financial gain from recommending this book and no connection to the author.)
In this following sections, I try to effectively summarize the main ideas in the book, and show how I put these ideas into practice.
Main ideas
Through analyses of historical data, the book shows that:
It’s generally impossible to beat the market in the long term (20+ years), where “beating the market” means outperforming the stock market as a whole.
Human psychology tends to work against us: we tend to buy when the prices are high (fear of missing out), and sell when they are low (fear of losing more).
Based on this, the book shows that it’s best to:
Match the market, rather than try to beat it.
Create a system that prevents our emotions from hurting our investments.
Investment plan
(For definitions of various terms used below, see Terminology.)
To “match the market”, the book recommends investing in ETFs that:
Together roughly represent the world’s economy. Good candidates are ETFs that track MSCI World Index, or FTSE Developed and FTSE Emerging.
Have a low management fee, e.g. below 0.25% / year.
Are from a reputable fund manager (e.g. Vanguard, SPDR, iShares/BlackRock).
Have various other properties, like suitable domicile (for your taxes), size ($100M+), age (5+ years), physical tracking, trading in your local currency, and are accumulating (depending on the tax laws in your country).
In addition, the book recommends investing in reliable bonds to increase your portfolio’s stability by sacrificing some long-term growth:
This part normally represents between 10% and 50% of your portfolio, where lower values are recommended if you’re younger or have other stable assets.
The recommended bonds are short-term government bonds and global inflation-linked government bonds.
The bonds, too, should normally be bought through ETFs rather than directly.
Using the above, you can create an investment portfolio where each ETF represents some target percentage of the total portfolio value.
Such a portfolio, where the stocks represent around 75%, is statistically expected to return around 7% per year over the long run (20+ years). Therefore, the portfolio is expected to roughly double every 10 years (not accounting for inflation).
Dealing with human psychology
The book recommends the following system:
Do not follow any financial news. If you hear something good/bad, doing nothing to your portfolio is statistically the best thing to do.
Invest your monthly savings. Always buy the ETFs that are currently below their target percentage in your portfolio.
Rebalance every 6-12 months. Sell ETFs that are above their target percentage, and buy those that are below, to get them to roughly the target percentages.
With the above approach, you will often buy an ETF when its price is low and sell it when its price is high.
How I put this into practice
I live in the European Union, so I bought Euro-based ETFs domiciled in Ireland.
The stocks represent 75% of my portfolio, and include the following ETFs:
Vanguard FTSE Developed World UCITS ETF. 75% of the stocks.
Vanguard FTSE Emerging Markets UCITS ETF. 15% of the stocks.
SPDR Dow Jones Global Real Estate UCITS ETF. 10% of the stocks.
The bonds represent 25% of my portfolio, and include the following ETFs:
JPM BetaBuilders EUR Govt Bond 1-3 yr UCITS ETF. 25% of the bonds.
iShares $ Treasury Bond 1-3yr UCITS ETF. 25% of the bonds.
iShares Global Inflation Linked Govt Bond UCITS ETF. 50% of the bonds.
To manage my portfolio, I use an investment platform called Interactive Brokers, since it allows me to buy almost any ETF, is reliable, and has low transaction fees. There are many other investment platforms - please do your own research.
Interactive Brokers has a referral program, which matches your initial investment up to $1000. You can use my referral link, but please don’t feel like you need to.
FAQ
Should I buy crypto? Crypto is generally not linked to an underlying asset, and its markets are relatively unregulated, which invites a substantial amount of fraud. In addition, the crypto market is too new for there to be a proven long-term passive investment strategy.
Should I buy gold? In the long term, the price of gold is fairly stable after adjusting for inflation, which means that holding gold is, in the long term, worse than investing as described in this blog post, assuming the average inflation is lower than 7%.
Should I buy individual stocks/smaller ETFs? By doing this, you’re trying to beat the market as a whole, so you will, statistically speaking, likely do worse in the long term than following the described investment strategy.
Conclusion
I hope this post has given you a better understanding on how you can invest your savings, and helps you find an effective and stress-free way to grow your portfolio.
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Appendix: Terminology
Share/Stock. A share in the ownership of a company.
Dividends. Distribution of a company’s profits to its shareholders.
Bond. A loan to the issuing company/country for some period that results in interest at the end of the period (maturity date).
Stock Exchange. A market where stocks are bought and sold, e.g. New York Stock Exchange (NYSE).
Publicly Traded Company. A company whose stocks can be bought and sold by the general public.
[Market] Index. A weighted list of companies whose stocks are publicly traded at stock exchanges. The list is normally updated according to a predefined formula, e.g. S&P 500 is an index that tracks the largest 500 US exchange-traded companies.
ETF (Exchange Traded Fund). ETF is a fund that normally tracks an index and is traded at a stock exchange. There can be many ETFs for a single index.
Bond ETF. An ETF composed of bonds where bonds of a certain type are continually bought (early in their lifetime) and sold (late in their lifetime) to achieve an equivalent result of doing so manually yourself.
Fund Manager. A company that creates and manages funds, including ETFs.
Management Fee. A percentage fee that the fund manager charges annually to manage a fund.
Investment Platform. A company that holds cash, stocks, bonds, etc. on your behalf, and normally allows you to quickly and easily trade.