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How do I invest correctly?

Do I have any regrets?

Yes.

My main regret is not starting my investment journey at a young age. It would have been wise to actively invest with a clear plan during my teenage years. Ideally, I should have gained knowledge about long-term investing and its benefits while still in school.

I will share my thoughts on the concept of investing – the way I see it and provide some key insights from my personal experiences.

And I will answer your most important question: Can I be a good investor?

Spoiler alert: I genuinely think that anyone can be a successful investor.

What makes a good investor?

Many believe that being a good investor requires expert knowledge of the stock market or extraordinary intelligence in selecting stocks. However, it turns out that anyone can be a good investor by following a few simple steps. Being a good investor involves developing good habits, effective planning, and financial savvy. I strongly believe that financial intelligence should be accessible to everyone.

An intelligent investor understands the purpose behind their investments and the assets they invest in. They can consistently contribute to their portfolio over time and maintain control over their entire investment strategy.

Four simple do’s:

  1. Do create a plan – Establish a clear investment strategy, investing schedule, time horizon, and goal, such as investing for retirement, a house, or your child’s college education.
  2. Do build a diverse portfolio – Avoid putting all your eggs in one basket. Different asset classes, from stocks to bonds, carry varying levels of risk and return. By diversifying, you can mitigate extreme losses.
  3. Do stay the course – Once you have developed a plan and begun implementing it, stick to it. Invest consistently and regularly.
  4. Do keep learning – No investor knows everything. As our world evolves, so do the markets.

Two important don’ts:

  1. Don’t try to time the market – I will show you why it is a fool’s game.
  2. Don’t make emotional decisions – Seeing a decline in your portfolio can feel like getting punched in the belly. Keep your composure and inhale deeply.

How do I start becoming a good investor?

My investment strategy starts with saving money – the first pillar of my investing foundation.

Warren Buffet, a renowned investor, once said, “Do not save what is left after spending; spend what is left after saving”.

Yes. Savings are the initial requirement as an investor. I firmly believe in taking care of yourself first. Therefore, I allocate a dollar to myself before considering any purchases. Many people hold the belief that spending comes first and saving comes later. In my opinion, this formula leads to disaster, as it eventually results in losing everything.

The 50-30-20 rule is a good way to start. The 50-30-20 rule is a simple way to budget your monthly net income. It states that 50 percent of your net income should be earmarked for fixed costs (such as rent and bills), 30 percent for personal needs (such as hobbies or going out) and 20 percent for savings.

The purpose of the rule is to manage your money more consciously and thus build up assets in the long term. Try to keep to the 20 percent savings as soon as possible.

When do I start?

The timeframe is the second pillar of my investing foundation.

The earlier I begin investing, the more I will benefit in the long run. Yes, you can start whenever you want. Regardless of age, anyone can invest and save, but starting as early as possible is ideal. The power of compound interest is the 8th wonder of the world, highlighted by none other than Albert Einstein.

Imagine I am an investor in my 30s, and I have invested in the S&P 500. Should I be concerned if the S&P 500 is currently at 4300 or 3400? Yes, I know, that’s a 20% difference. To put it into perspective, the S&P 500 has averaged a return of approximately 10% per year over the past 100 years. Thus, in terms of the time frame of investing, it is a grain of sand in the desert. It is a blimp in history.

Chart 1: S&P 500 since inception

Quelle: TradingView

Allow me to provide two examples that illustrate my perspective on investments in relation to the timeframe and the power of compound interest. In both cases:

  • We start with an initial investment of CHF 10,000.
  • We contribute CHF 250 every month (Dollar Cost Averaging – DCA).
  • We have a timeframe of 30 years.
  • The market yields an annual return of 10%.

Example A: Immediate market rise

Quelle: arvy, investment calculator

Let’s conduct a thought exercise now. Imagine you are so unlucky that the epidemic starts to spread the time you invest CHF 10,000 in the S&P500. As in 2020, the stock market drops 30% during the ensuing few weeks, and your original investment falls from CHF 10,000 to CHF 7,000. However, even in such a situation, we remain committed to our investing strategy, maintain our belief in the power of compound interest, and continue DCA at the agreed-upon rate of CHF 250 per month. Is it the end for us?

Example B: 30% market decline after the initial investment

Quelle: arvy, investment calculator

Despite this unfortunate scenario, the difference in the final amount is only CHF 50,000 compared to the previous example. It is a mere 8% difference, even though we initially experienced a 30% decline – a worst case timing.

Lesson: Timing the market for long-term investing is a fool’s game.

The most important part is to start the journey.

Consistency and adherence to your plan are paramount

This demonstrates to me that timing is not truly significant. Rather, it is the time in the market and consistency of DCA that matters.

Assume I manage to accumulate a larger sum of money. With an index like the S&P 500, it is rare for a 5-to-7-year period to pass without experiencing a 20-30% drawdown.

Therefore, when these drawdowns occur occasionally, once I have a larger sum saved, I could:

  • Increase the frequency and amount of my DCA. For example, from CHF 250 to CHF 500
  • Decide to put in a larger amount of capital overall when the S&P500 has dropped by 30% or more

In investing, I do not need to know what will happen next, and I cannot know what will happen next. It is as simple as that.

For me, consistency is key. I’ve been following this approach for a decade, and together we can continue it for many more decades.

We want you to join us and take advantage of the greatest wealth creation machine ever – the financial market. We manage long-term investment strategies to compound your capital. And explain it along the way.

arvy’s takeaway: Good investors do not excel at investing huge sums or picking secret stocks. They develop an investment strategy that suits them and strive to adhere to it, regardless of what life throws at them. To harness the power of long-term investing, these three fundamental rules are vital: invest early, reinvest the returns, and ensure broad diversification.

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