You gotta Risk it to get the Biscuit 🍪

Hello ladies and gents,

TFG here. We’ll keep it short and sweet today, because we all know that holidays are around the corner and attention span for anything is at this point on the low end.

• Part 3 of Investing series - Strategies and risks

• Closing the Gap - Selena Gomez

• Book of the month - Intelligent Investor by Benjamin Graham - part III

LET’S COVER THE BASICS

Navigating Risks with Strategic Moves

We are in the 3rd quarter of the investing basics game so high five! 🖐️

In the investing introduction post we spoke about investing being a marathon, not a sprint. Which brings us to the first important thing when selecting your investment strategy - time horizon¹. Having a long time horizon when investing is 🗝️. Why? Because no success or money comes overnight. 

As a general rule backed by historical movements, the stock market goes up on average 8% annually. However, market fluctuates for reasons such as world pandemic, political events or bank crashes. If you hold asset for the long run, you are also able to take on a larger amount of risk, because you have a longer time horizon in which you can reap the returns that market can give and you can sell the asset when you are in the green.

Another very important thing to keep in mind when investing that is tightly related to long-term time horizon is the compound interest² concept.

This is where things get interesting, but in a good way. The simplest way to describe compound interest is that you earn a return on the return you have previously earned. Let’s do some math.

1. You invested 1000 € at the beginning of the year.

2. Let’s say that average return this year was great and it was 10%. You will end the year with 1100 € in your portfolio.

3. You don’t invest anything, but you keep the money in the market for another year, that again has a great return and goes up another 10%.

4. By the end of the second year, you will have 1210 €.

5. After 10 years the initial 1000 € will turn into 2593 €, which is already 1593€ more than you have initially invested.

All because you waited long enough time that the compound interest did its *magic*.  

Let’s look at this graph.

• You start year 0 with 1000 € of initial investment

• Each month after that you add additional 50 €

• Average yearly return is 8% and you do this for 20 years

• Your total investment in that period is 13.000 €

• You end up with 32,118.14 € at the end of 20 years

Can you imagine if you did this for 30 years or added every month 100 € instead of only 50?

• if you did this for 20 years and added monthly 100 € instead of 50 € the number would be 59,575.31.

• after 30 years you would have 146,002.51.

Let that sink in.

But, to get the full picture, we also need to talk about another important thing.

Risk³. This is another important factor that will determine how you will invest your money. So far we spoke mostly about the upsides of investing. However, there are no guarantees for success. All investments involve some degree of risk and you need to think about how much risk are you willing to take on. This usually depend on:

• Age

• Goals

• Lifestyles

• Financial situations

• Available capital

• Personal situations (family, living situation)

May I suggest reading again this post about financial planning before you start investing? Without having a plan in place it will be a bit harder to decide which strategy of investing to choose and how much risk you are willing to take.

Before we jump into actual strategies another important thing we need to talk about is diversification⁴. This one goes hand in hand with risk planning. More diversified your investment portfolio is, less risk you are holding because your investment is spread among different assets (stocks, ETFs, gold, art etc.) that are dependent on different market movements and volatility.

Now let’s look at 3 simple strategies, especially for anyone that is just starting out:

1. Buy-and-hold
   This one is pretty straightforward. You pick an investment, you buy it and then hold for a couple of years. Patience is paramount, so do not go and take the money out when things are not looking well. Remember that magical graph.
   Buy-and-hold strategy supports the idea that “time in the market” is better than “timing the market” a.k.a choosing the “best time” to invest and trying to beat the market.
   

2. Dollar-cost averaging
   Or euro-cost averaging. This is a gradual investing strategy. Instead of making one huge investment at once, you invest smaller amounts on monthly/weekly or quarterly basis. Whatever works for you.
   By investing gradually you are buying the assets at different price points and you are getting a nice average price. This way you avoid investing everything when the price is the highest and lower the risk.
   

3. Core-satellite strategy
   Idea here is that 80% of your portfolio (the core) should be in a low-risk diversified portfolio. The remaining 20% (satellites) of portfolio can be filled with riskier assets.
   For example, 80% of portfolio should be a mix of various mutual funds and ETFs and 20% in individual stocks, commodities, crypto.

But regardless of which strategy you pick, you always need to keep in mind the following golden rules:

• patience is 🗝️

• do not put all 🥚 in one basket - diversify your portfolio

• don’t panic when things don’t look golden 📈

I hope this was short and sweet enough.
And understandable.
And educational.

Since next time I’ll slide into your Inbox Christmas will already be behind us, I wish all of you a very Merry Christmas and I hope you will enjoy some nice family time and most importantly - eat some great food 😏

• ¹ Time horizon - an investment time horizon, or just time horizon, is the period of time one expects to hold an investment until they need the money back. Time horizons are largely dictated by investment goals and strategies.

• ² Compound interest - interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

• ³ Risk - takes on many forms but is broadly categorized as the chance an outcome or investment's actual gain will differ from the expected outcome or return.

• ⁴ Diversification - a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk.

CLOSING THE GAP

Selena Gomez

We know her as a singer, actor and the most followed woman on Instagram, but I want to talk about some other aspect of her today.

Selena the businesswoman.

She is another woman on the trajectory to become a billionaire. She owns several businesses, including her beauty line Rare Beauty, a health platform Wondermind, and a production company among others. The most successful of them is the Rare Beauty that was launched on September 3, 2020 and it earned $100 million in revenue only that year. The make up brand is now generating $300 million, and has an estimated worth of $1.2 billion. Inside the Rare Beauty they also have a non-profit division to which they have pledged 1% of overall sales.

She has always been very public about her mental health struggles, which has resulted in another business - Wondermind - a platform that is trying to destigmatize mental health issues. They also have a great newsletter so I recommend signing up.

BOOK OF THE MONTH

The Intelligent Investor

by Benjamin Graham

Let’s start with a quote from a stoic philosopher:

I think that by now it is clear, that there is no one recipe for investing that everyone can follow. Even though you are investing in “Mr Market” as Graham likes to call it, you should not be always listening to his advice. 

Mr Market goes up one day like a lunatic and down the other, like there is no tomorrow. He comes in the morning screaming at you “sell sell” and “buy buy” at the end of it. Should you listen to this bipolar creature all the time? Of course not. You need to take control of your emotional and financial life and not let him dictate it.

However, you shouldn’t ignore him entirely. His job is to provide you the prices and your job is to decide whether it is to your advantage to buy at that specific time. You do not have to trade with him just because he constantly begs you to.

You can not control Mr Market. Investing intelligently is about controlling the controllable:

• your trading costs - picking a trading platform with low costs, trading rarely, patently

• your expectations - by using realism, not fantasy, to forecast your returns

• your risk - by deciding how much of it you are willing to take, by diversifying and rebalancing if needed

• your tax bills - important - to make sure you know the tax implications in your country and hold assets for longer period of time because often you can lower your taxes that way

• and most importantly - your behavior

But why is this sometimes harder than it seems?

It turns out that we are the problem. Well, out brain at least. Humans are pattern-seeking animals. Neuroscience has shown that our brain is designed to see trends, even if there aren’t any. If the stock goes up a few times in a row, your brain expects that it will keep going up. Your brain chemistry changes as the stock rises and it is giving you a “natural high”. You effectively become addicted to your own predictions.

When the stock price drops, the financial loss fires up your amygdala, which is the part of your brain that processes fear and anxiety. This then causes the “flight or fight” response and pushes us towards taking the money out of the market, when we are already in the red. Mistake.

In that moment you should remember - falling prices are good news, not bad, since your are able to buy more stocks for less money.

If your investment horizon is long - at least 25 to 30 years - there is only one sensible approach:

To be an intelligent investor, you must also not compare yourself to others because - comparison is the thief of joy. In all areas of life. It’s your life that you are living, not others. Also, no one’s gravestone reads “She beat the market”.

The whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs. In the end, what matters isn’t crossing the finish line before anybody else, but just making sure that you do cross it.

SOME NEWS

• You can do some compound interest calculating yourself by using this calculator.

• Yesterday we had fog the entire day. Literally. So I went searching for alternative locations. This could do.

• If you are still missing some Christmas gifts. This guide might give you some ideas.