How to build Wealth part 3 - Safe long term investing

Hello LeoFinance. Today we are going to look at How we can start to build wealth. This is the second post of the series that will be uploaded every Thursday for the next 4 more weeks. The goal is to help provide some information on how to start building your own personal wealth from start to finish (click on links to read from step 1). There's nothing exciting about what we'll talk about, in fact, it's all very boring and the hardest skill required is the discipline to resist putting your money into rubbish defi magic bean projects, forex scams and other stuff where you are sold a hope.

Authored by @silverstackeruk

In this series, we will look at how anyone can start to put a plan together, set goals and achieve your goals. We're going to set the main goal to be retirement but your goals can be everything you like. These posts will not be long to keep the information bite-size and easy to digest.

1- Get Prepared - link 2- Emergency fund - link 3- Safe long term investing 4- Passive are active incomes/side hustles 5- Diversification 6- Retirement

3- Safe long term investing

Now that you have no bad debt and have an emergency fund in place, you can finally start investing. All the hard work you've done is about to pay off because you'll have leant alot of new skills by now that you may be unaware of. For a start, you will have learnt money management skills. You'll know how you budget and live within your means, this takes alot of planning and discipline to complete so if you have made it this far, you owe yourself a pat on the back because, with no bad debt and an emergency fund, you'll be giving yourself the best chance of building wealth.

The reason alot of people fail is that they sell out investments too early. The average retail investor will hold an investment for 7 months whereas the average institutional investor will hold for 11 years. People that buy in and out of investments will be paying lots more broker fees, creating taxable events and most importantly, using up their time. Most of these investors will be investing in stuff that's already in the news and base investments on "a feeling they have". These people in general will always be broke in life. You can easily build wealth the old fashioned way and use the power of compounding. You might get lucky with the next GameStop but would a 10x change your life? You might think 10x would but you'd need to have 100k+ in it and if you reading this, chances are you dont have $100k.

Boring long term thinking is the only road to take. Invest into something that carries a small risk, cost average your investments in weeks or months and stick to it. Little and often soon turns into something massive, maybe not soon but time goes quickly and years roll by.

a- Decide on a target It is time to switch over from saving an emergency fund to investing and starting to build wealth. When deciding on a target, you're setting a goal to hit. This could be $1000 or $50,000k. It should be a number you think you can save in 3-5 years time. Dont BS to yourself and think you can save $100 if you can. Set your target at what you think you can save at a minimum. If you can invest $30 per week, after 5 years would have around $9200 if we factor in a 7% APY. You make your target $10,000. When you invest more than $30 per week, you shaving time off. This is a good time to introduce a side hustle that will help you get to the target faster but that's next weeks post. The quicker you hit your target, the quicker you can move on to the next investment because when you hit your target, you have something to lose/protect and this is when you can think about starting to diversify your holding and maybe get into a new investment class.

b- Pick your investment In the beginning, there's no need to diversify your investments that much because you dont really have anything to lose at this stage. When we diversify, we are protecting our wealth by hedging investments against each other. This is more true for different classes of investments (Stocks, crypto, Pm's) and not so much having many investments in 1 investment class. Point is when you are starting out, you dont really have anything to lose so you should pick and invest into the best investment you can find. If you see 5 good investments but you know one will do better than the others, why invest into all 5? Pick the best one. If you'd have invested in BTC 18 months ago and invested the same amount equally over the top 10 back then, your BTC investment would be doing better. 6 of today's top 10 were not there 18 months ago when BTC last bottomed out in March 2020.

There are lots of things you could go for here but I'd advise (not advice) a simple index tracker fund. These are a dead easy way for anyone to get into the stock market. Index funds will follow the market so you'll have good years and bad years but in general, these will provide a 5-8% return over the mid to long term. The most popular one is the SP500 which offers investment into the top 500 traded companies on the American market. This is your Apple, Amazon, Mircosoft, Facebook, etc. There are many different index funds for each market be that for the American markets, UK markets, Chinese markets, etc. Do not feel overwhelmed by all on offer.

I would not advise anyone to be investing in crypto at this stage. It will be tempting but that time will come later. Crypto is still a new market class, it's nowhere close to being regulated properly and carries alot of risk because we dont know what can happen tomorrow.

Going for individual stocks would not be advised either, you can do this if you pick a safe stock. Something that you know will still be an active and profitable company in 20 years time. Nike, McDonald's, Walmart, Visa, Sony came to mind as examples.

c- What you're aiming to do at this stage Because this is your first investment(s), they should be rock solid and proved the test of time. Think of this as your base investment, the one that's gonna start it all. Using the example above of $30 per week earning 7% per year for 5 years, you would be investing around $1500 per year.

You can see after year 5, you will saved just under $9200. You can let this egg compound and get massive by itself and look into building your next egg. Fast forward 15 years to give you an investing time of 5 years and a holding time of 15 years, you'd get results something like this.

This is what you get for saving $30 a week for 5 years ($7827) and sitting on it for 15 years. $25,294 ain't a small amount and think if you do this every 5 years and build lots of nest eggs. What if you have 30 or even 40 years to just sit on it. Changing 15 years to 25 give you $49,500 and at 35 years of compounding, you'd have $98,000 growing by roughly $6400 per year.

Roundup

When you are starting, invest in something safe, something that has stood the test of time and very low risk over long periods of time. By doing this you are basically growing a base that you leave to compound until you plan to retire. This will free you up to make investments that are a little riskier with the knowledge you have an emergency fund and a decent index fundholding.

Next week, we'll look into passive and active incomes. I say passive but when you're starting from nothing, it's active income that requires you to do something. Having a side hustle can help you to get to your target faster and more often than not, side earnings can be more than what you would be investing from your paycheck.

I hope you have enjoyed reading through this 3rd part of this series.

Posted Using LeoFinance ^Beta