Investing Series: What is Investing, exactly?
This is a part of the Investing Series.
What I’ve noticed is that we PF bloggers fall into 4 camps:
- Investing/Stock Technical Bloggers: They talk about stocks, dividends, mutual funds
- Lifestyle Bloggers: They tend to talk about their life and their money; either in debt or not
- Informative How-To Bloggers: They give FAQs, How-To posts and other Money-To-Do Lists
- Frugal Bloggers: They wax poetic on the wonders of white vinegar and saving toilet paper
I am probably a Lifestyle Blogger more than any of the other categories (well, maybe Informative too), but I’d like to see if I can find a balance between all 4, because I do read all those kinds of blogs and they all fall within my interests.
(Also, this blog is going to get stale if I keep repeating and harping on you to budget and track your expenses to get out of debt and onto the path of wealth.)
So this is the first of many posts in the Investing Series that will appear over the year on this blog, which will run on Saturdays as they’re completed.
Now a lot of you may think you are not at this point and want to run away, but to that, I say….
YOU DON’T NEED A LOT OF MONEY TO START INVESTING!
All you need to invest is $25 to get started (minimum purchase amount for an index fund).
Before you roll your eyes at me, I KNOW you have at least $25 lying around somewhere.
I KNOW IT.
I’m the girl who once found a $20 bill on the ground, and regularly finds dimes and quarters at least once a day.
I am just like those fancy French pigs that dig for truffles except I sniff for money and bank it instead of trying to eat it.
So trust me. I can smell that extra $25 on you.
I know you’re thinking of using that $25 to buy something frivolous and enjoyable, but you should really think twice before you do it, or else you are never allowed to write, say or think the words: I don’t have any money to invest.
…… and I especially don’t want to see this face:
You can start now, start TODAY and start small.
You have money. Budget and track your expenses and you will just have to choose what you want to do with it.
Now that we’ve established that you have money to invest, let’s talk about what investing means:
WHAT IS INVESTING?
It’s putting your saved money into something (other than in savings accounts, which are considered ‘cash’ or “like cash”) knowing it may bring you a Return on Investment (ROI) in the future, after taking inflation into account (more on that later).
THE DIFFERENCE IS ALL ABOUT THE LEVEL OF RISK!
You may be wondering why saving your money in a chequing account is not the same as investing.
Well, investing is more than just saving your money, because that is pretty much guaranteed as a return on investment. You know you’ll get 1.8% or 2% on your money in a high-interest savings account and it has nothing to do with the markets going up or down.
Investing has an element of risk involved and it is not guaranteed, which is why you can earn more investing your money than you can (think 18% or 20%), rather just stuffing it in some savings account.
It’s also basically betting that you’ll be buying something that will increase in value, and be worth more than what you paid for it.
In general, investing your money means:
- Buying stocks
- Buying mutual funds
- Buying index funds (you can think of them as a type of mutual fund)
- Buying collectibles (that will increase in value, but it’s a risky business )
- Buying real estate (tricky, as not all houses in all countries have good returns over the long-term)
- Buying private stocks in start-up companies in exchange for capital*
*This is kind of like lending your uncle $$$$ to help him start his small business.
And investing your money does NOT mean:
- Putting your cash under your bed (you’re actually losing money every day due to inflation)
- Putting it in a savings account for the interest (it just basically evens out to $0 because of inflation)
- Buying a lottery ticket of any kind in hopes of winning the jackpot
- Buying jewellery & clothes (I loathe the term “investment shopping”!!)
- Buying collectibles that are marketed as “limited edition” when it isn’t
- Buying cars (unless they’re collectibles or rare with a lot of history)
There are plenty more examples I am sure you can all come up with but the idea is buying things that you can hold and sell for a lot more money than if you had kept it in a bank account for the same amount of time.
WAIT, YOU PUT “COLLECTIBLES” UNDER INVESTMENTS!?
Collectibles can also be investments of a kind, although they are riskier (in my eyes) than straight-up stocks, or mutual funds.
Collectibles refers to anything that can be kept and resold at a higher price later.
Booze is a big one — for example, people buy wine by the cases from the best years, leave it in a wine cave, and the value just increases as the wine ages.
Art is another, and my best example is to let’s say you were that guy (Irving Blum) the art dealer who bought the 32-piece set of Andy Warhol’s famous Campbell Soup painting practically for just a song ($1000 in 1962), before he became the Andy Warhol with his famous Marilyn Monroe paintings.
He bought the entire set of 32 paintings for about $1000 in 1962.
After Warhol was hailed as a great pop artist of the 60s whom nobody understood at the time, the same set of 32 Campbell Soup paintings were sold for about $15 million in 1996.
Not a bad investment! 34 years, $1000 in the pot, and he came out $15 million richer.
Other “collectibles” include comic books (first edition of Superman for instance), rare books (first, signed edition of classics), and basically anything you can think of, including cars.
Some cars are worth a heck of a lot of money due to their history (who drove it for instance), or just because they’re rare.
YOU CAN ALSO MAKE SHORT INVESTMENTS BASED ON HUNCHES
We consumers are a funny bunch. We’ll pretty much pay anything when we want something badly enough.
Anyone remember Tickle-Me-Elmo or any of those other toy crazes that made parents lose all rationality during Christmas season?
You probably also knew someone (or at least I did) who used to do their research on the next hottest toy craze, and he’d go and buy up ALL THE TOYS, then re-sell them on eBay to desperate parents who absolutely needed to buy little Mikey that Tickle-Me-Elmo he had been screaming about.
Or how about a more recent example, like Hostess Twinkies? People thought they were disappearing, and instead of $4.50 for a box of 10, people were raking in the Twinkies cash and selling 12 boxes they bought at retail for $54 for a jacked up $300.
WHY ARE CARS AND JEWELLERY NOT GENERALLY CONSIDERED INVESTMENTS?
(Plus once the price tag gets snipped off, it doesn’t look as shiny.)
Depreciation is when something goes down in value due to “wear and tear” (read: it was sold, and you cut off the tag, so to speak and are unable to return it any longer).
For jewellery, unless it’s a famous diamond that was worn by some famous actress back in the day, diamonds for instance, are not all that rare.
An example of a rare item with a lot of fame is Elizabeth Taylor’s “Taylor-Burton Diamond Ring” (kind of an ugly name), which is 33.19 carats and has a lot of cachet attached to it:
(That ring is bigger than her head!… Okay, not really, but it looks like costume jewellery. Via)
Another example is the Hope Diamond which is rare because it’s BLUE:
Otherwise…. chances are that plain ol’ H20 (water) is considered to be more scarce and rarer than a diamond. Hey that’s an idea… buy some fresh water and give that to your fiancee instead.
For cars, unless it has some similar history (famous, legendary, blabeddy bla bla), it is not likely to be worth anything.
In fact, buying a brand new car and then driving it off the lot, instantly decreases its value.
Note: The optimal point for buying a car at the lowest point of its depreciation while still being considered a fairly new car, is 3 years.
Buy cars that are about 3 years old, and you won’t lose your shirt in depreciation.
In short, unless something has a famous history, it is not wise for us ordinary folk to “invest” in jewellery other said pieces for reasons other than sentimental ones.
WHAT IS INFLATION AND WHY IS IT RAINING ON MY PARADE?
I know it must seem weird — how can you put $1 under your pillow and in a year, imagine that the same $1 could be worth less?
It’s because it all hinges on the fact that your money is simply not making you any money (yes, the power of compounding interest comes into play here).
Inflation just means that a dollar today is worth more than a dollar in 10 years, because you have to take into account what else the dollar could have been doing other than snoozing under your pillow.
From my tiny little chart above, you can see that if you just left your $1 under your pillow, you would have missed out on $0.20 – $0.63, because it was lying there, doing jack squat for you …. that lazy #*$&$ dollar…
Another way to look at it, is to understand that the price of everything goes up eventually, and if your money stagnates and earns 0%, it won’t go far in terms of purchasing power.
For example, people used to pay $0.05 for a bottle of Coca-Cola in the past. Now it’s about $1.00 for a can.
Listen, just talk to any grandparent and ask them how much things used to cost ‘back in the day’.
You’ll get a nice lesson in the eroding power of inflation on your money as well as some interesting stories to boot.
HOW DO YOU CALCULATE A RETURN ON INVESTMENT (ROI)?
You can calculate the return on investment on anything, the same way you would calculate how much money you earned in interest, dividends or in the value of the stock!
The Quick & Dirty Simple Calculation for Return on Investment:
Amount of your Financial Gain (Profit) / Total Cost of your Investment
Then if you want to make it a %, just multiply it by 100.
Finally, you can also figure out the simple ROI per year, by dividing it by however many years you’ve held said investment.
Note: There’s also another one that is more complicated, taking into account that the present value (PV) of your dollar will not be the same in 10 years, but for simplicity’s sake, let’s stick to just a straight-up ROI.
HOW DO WE USE THIS ROI CALCULATION?
Well let’s take for instance a very good year for a particular wine (real-life example):
It used to cost only $90 to buy that bottle of wine in 2009 (which you actually end up buying in 2010 because they had to harvest and bottle it).
In 2013, that same 2009 bottle of wine is now selling for $366.
Let’s say you invested $90 in a bottle of wine, and kept it (properly) in your wine cave for 4 years:
Find the Amount of your Financial Gain (Profit):
$366 – $90 = $276
What was the Total Cost of your Investment?
Now divide your Profit by your Total Cost of your Investment:
$276 / $90 = 3.06
And multiply that number by 100 to get a Percentage (%)
3.06 x 100 = 306%
In 4 years, the price or the value of the wine has tripled, and is now worth 3 times what you paid.
Finally, figure out the ROI by year:
306% / 4 years = 76.50%
Imagine if you bought a whole case of that wine?!
Even better is if you could leave the wine alone and don’t sell the bottles until 10 years later — who knows how much it might cost to buy a bottle!?
At the very worst, you could drink your stash.
Updated: As PK from DQYDJ pointed out correctly, you need to also know what other investments are selling for and have targets in mind.
For instance, if you invested a ton of money into wine, but you could have done better with just buying stocks of a winery, you should also be doing those kinds of calculations to know whether your money is doing better than if it were in something else.
A benchmark I like to use, is the overall stock market, which incidentally is how I like to invest my most of my money by way of index funds.
- Investments are things you buy that return a value or an ROI over a period of time (short or long)
- Investments can include riskier things like collectibles (art, dolls, furniture, wine)
- Investments are generally not things like clothes, cars, or jewellery (again, unless they’re rare)
- Investments are affected by inflation and depreciation, among other things
- You can calculate an ROI by taking your profit and dividing it by your total cost of investment