For a lot of people, not just women, reducing their expenditure and increasing their savings is an important part of becoming financially independent. However, this strategy has a missing link. Although over the last decade we have experienced rising inflation, historically, inflation is a natural part of the economy. That means that your savings are declining in value every single year. You need to invest in order to counteract the effect of inflation on your savings. Without investing, inflation will eat away at your savings and work against your goals of financial independence. The question for us is, how can women start investing?
One of the biggest misconceptions about investing is that you need a fortune to invest. That, however, is not the case. Many brokerages have adopted what is known as fractional ownership of shares. Here’s an example of how that works. Say for example you admire Allstate’s business model and believe that the insurer is heavily underpriced. Sadly, you can’t afford its $130 shares because all you have is $50. Brokers such as Charles Schwab, M1 Finance, and Robinhood, allow you to buy fractional shares of listed companies. So, with your $50, you can buy a fractional share of Allstate. The barriers to investing have never been lower. Not only is fractional share ownership possible, but many brokers, that is, those businesses that execute trades on your behalf for some fee, have implemented zero commission policies. In other words, you do not get charged anything for investing. Charles Schwab, J.P. Morgan, Robinhood and others offer zero-commision trading.
The stock market isn’t the only place you can invest. You can invest in real estate, bonds, commodities, and many other things, depending on your interests, expertise, and budget. Despite that seemingly overwhelming universe of options, the principles of good investing are remarkably universal.
Perhaps the biggest barrier to investing is ignorance. If you do not have the time or inclination to do a lot of research, then your best bet is to invest in some kind of passive investing instrument. So for instance, you could invest in an index fund. In his 2013 letter to the shareholders of Berkshire Hathaway, legendary investor Warren Buffett outlined how his estate would be managed upon his death. He said that 10% would be invested in short-term government bonds and 90% in an ultra-low cost S&P 500 index fund such as Vanguard’s. According to Buffett, this simple strategy beat that of many professional investors. So what’s an index fund? An index fund is a collection of businesses (for instance, all the firms in the S&P 500) that is managed according to certain rules. The aim of an index fund is to match the performance of a set of businesses. So, for example, Vanguard’s index funds (they have more than one), try to track the performance of the 500 largest businesses in the United States. Having bought into an index fund, your next step is to hold on. A famous story demonstrates the importance of forgetting your portfolio, if you like. The brokerage firm Fidelity performed a study on its best investors. It found that its best investors were all dead. What did this mean? Investors, typically, tend to sell shares or holdings in index funds, when prices fall. It seems logical to limit your losses. The trouble is that over time, timing the markets is next to impossible, so investors who sell are often investors who miss the recovery, entering too late -scared by their losses- and performing worse than an investor who did nothing at all!
Before engaging in investing, you need to understand the performance fees if any, and any other fees that you will be obliged to pay. Verify if there is a minimum investment required. See how liquid the asset is, in other words, how quickly can you sell and turn it into cash? Above all things, go into investing with this mantra, “Do not lose any money”. You want to think defensive and be aware of the risks.
For the investor who is willing to put in the hard yards, perhaps the most important thing that you can do is read. Classics such as Benjamin Graham’s Security Analysis, and The Intelligent Investor, have guided many great investors. Peter Lynch’s books, One Up On Wall Street and Beating the Street have also been very popular. Philip Fisher’s book Common Stocks and Uncommon Profits Read the letters to shareholders that legendary investors such as Warren Buffett, Charlie Munger, and Marathon Asset Management have written over the decades. You have to keep up with the financial press, reading newspapers of record such as the Wall Street Journal, Financial Times, the Economist and others. You should also commit yourself to reading annual and quarterly reports of companies, economic data, and trade publications. When asked what the secret to becoming a great investor was, Warren Buffett said it was reading, and said that he reads 500 or more pages a day. He reads annual reports, books and newspapers every single day. Read websites like MoneySense to improve your financial literature. Despite the image that many investors have that investors are about constant trading with no time for anything else, the truly great investors know that much of your work is in building your mind and not trading. You have to go to bed smarter than when you woke up. The education of an investor is a lifetime process.
We all invest to get rich, but in order to get rich, you have to avoid getting wiped out in the markets. Always seek to have a margin of safety in your operations, so that in the event that you miscalculate, or something unforeseen occurs, you do not suffer any material loss. You have to survive to get rich.
When people promise you incredible returns, be very weary. If it sounds too good to be true, it usually is. Before deciding on an investment, you want to have done all your homework, and sought out all the reasons why your investment will fail to counterbalance your natural enthusiasm for the investment. It’s important to work on your decision making and understand why human beings make mistakes, in order for you to become a better investor. Understanding the psychology of human misjudgment will serve you very well going forward.
We are happy to provide you with more information on how you can begin investing.