The Ignorant Investor — Part 1

Another January gone, another resolution down the drain!

I don’t have time to do it today or this week, but I will start next week. I don’t know how or where to start from. I think I should get an expert to help me for best results and optimum outcome. I am already in pretty good shape, and the usual merry go round of reasons and excuses of all kinds. How many times have you said this to yourself or something along these lines about going to the gym or starting any kind of workout or basically doing anything that will improve your personal well-being, physical as well as mental, but requires some effort?

It’s the same set of logical reasoning a lot of us use with improving our financial wellbeing. The importance of saving and investing for the long term, or for the rainy day, or for our retirement is something we all understand on a general level, but still, only a few of us do that on a regular basis and the younger generation of today is one that gives very little thought to it. They consider themselves to be the carefree type, and ones that prefer to ‘live in the present’.

Given a chance, who amongst us would not like to have financial independence, build some sort of wealth, and minimize our dependency on a single source of income such as a 9 to 5 job, but the harsh reality is that very few of us are willing to put in the yards needed to gain this independence. Most, if not all of us would tend to agree that putting our hard-earned money into something that will potentially grow is more important now than ever, but still, we come up with new excuses or find some creative reason to either delay doing it or ignore it all together, until it’s too late to make any significant difference.

Governments across the world are cutting down on pensions, increasing the age when one can retire, cutting down on various medical benefits, inflation is going through the roof, interest rates are up and this all means that we need to have the financial means to look after ourselves and our loved ones, when the time comes. We should not just sit back and rely on governments or the social security system to take care of our medical bills, our pensions and our overall well-being — those days are long gone now.

Henry Brooks Adams said, ‘By Nature, man is lazy, working only under compulsion…” and this is something very easy to relate to for vast majority of us. But the good news is that even though building financial independence or taking the steps towards it requires consistent effort, but if done right, and if done regularly from a young age and for a period of time, there will be a time when we can sort of slide back to being our lazy selves and let our money do the work for us. We don’t have to make our money lazy. By making some smart choices early on, we can easily take control of our destiny, we can decide which vacation we will take, we can decide which house we will buy, and we can decide when we will retire, but you need to start making those smart choices now!

You might be wondering, what has going to the gym or working out got to do with saving and investing. A lot, I would say. The closer you look at the two, you will be amazed to see that there are many similarities between these seemingly very different things, and being consistent with one can help us in our journey towards the other:

World Economic Forum (WEF) recently in a report estimated that currently, only 33% of adults globally are financially literate, and in the Unites States, which has one of the most developed financial markets in the world, only 18.3% of those between the ages of 18–34 can correctly answer fundamental questions on financial knowledge. In today’s digital age, where every possible kind of information is available on our fingertips, this is a scary finding.

If some mundane social media challenges like flash mob, ice-bucket, egg crack and countless others, including those where people got seriously injured can gain global popularity, then why are we still lacking behind with financial literacy, across all age groups! What’s wrong with us? If, we can find the time, motivation and drive to do these senseless so-called challenges, then what’s stopping us from building our knowledge base with something that actually makes sense, something that will help us and our loved ones for years, if not decades (or even generations, for the few chosen ones) to come.

As I write this, there are two big active wars going on in the world, there’s the Russia-Ukraine war and the wider conflict in Middle East involving Israel, Palestine, Syria, Iran and several other neighbouring countries. We are living in very uncertain times right now, and no one truly knows what’s going to happen next, hence, working towards building our financial independence should not be something that can be ignored or left as an afterthought or left for the adults in the family to think about.

Regular saving and investing should become a part of our routine, and it should be engrained in our minds from an early age. This might raise some eyebrows, and I am open to critical feedback, but just like we support our kids with weekly piano lessons or regular soccer practice or ballet or whatever they are into, what’s the harm in having a weekly financial lesson for our kids. Would it be really that far-fetched or even absurd to imagine our kids asking, ‘so what are we doing to invest in next’ or ‘how much did we save this month’?

Point to note here is that I have been using both the terms saving and investing in nearly equal measures so far, as both these activities are equally important. In simple terms, saving is something which is 100% in your control — you know what your monthly income is and what your monthly expenses are and what is ‘left over’ after you deduct the expenses from your income. Now part of these savings can and should be used for making investments into something that will give better and higher rate of returns, but a small amount should be set aside for the unforeseen situations.

Irrespective of what your net income is, saving and investing is something that we all can do. The degree and amount of this will undoubtedly vary with the income, lifestyle and a bunch of other factors, but nevertheless, a portion of our net income can and should be saved and used for making investments. We’ll cover the topic of managing your expenses in further details in a later post, but for now just understand that out of your monthly income, the more you are able to save and the more you are able to invest now, the easier your financial health would be down the path.

It’s important to understand another difference between saving and investing and why both are needed. By saving I mean assets which are liquid, available and accessible to you, when you need it — particularly in those unforeseen and unexpected situations. If you put all your money into investments, then there’s always a possibility that the time when you need the money most, the financial markets might not be in your favour. In this case, you can end up more on the negative side of the spectrum compared to what you were expecting.

A bit of a background on what or rather who sort of pushed me over the edge to write this stuff up — my teenage kid. Over the last few years, he has been doing odd summer jobs, some side gigs here and there to make extra pocket money, and overall, he’s quite careful with his money. He has his own bank account and keeps a close tab on who has paid him for the gigs and who has not. A while back I asked him, if he would like to invest part of that money and see that investment give him returns better than the near negligible interest that the bank pays for a standard checking account. Of course, he said yes, but when I asked what sort of investment he would like to do, I realized he has no idea what I am talking about or where to start from or what to do next.

This was a bit of self-reflection moment, where I felt that as a father I have tried to teach many things to my kid, but this very important life skill has been involuntarily left out thus far. As parents, my wife and I have been making some investments on his behalf, you know the usual college fund sort of thing to give our kid a head-start when he’s ready to move out of the nest, but we have not actively taught him about it. I suppose I was like the millions of other parents out there who thought that financial investing is something for the adults, lets the kids be kids.

As per the WEF report mentioned earlier, I suppose my kid is not the only one with this skill gap. It’s not only the kids who are lacking these valuable skills, but this gap is there across all the age groups, and across all the countries. It would be easy for me or any parent for that matter to blame the schooling system for not teaching this life enhancing skill to the kids in school, but that’s a topic for another day. Sometimes it’s better to look in the mirror and question ourselves than point fingers at someone else. “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime” — I suppose I have been giving the proverbial fish to my kid, rather than teach him how to fish!

I am not an investment banker, nor do I have any professional training in this field, but so far, I have managed to make some sensible investment choices, with what I consider to be decent returns. I still have a regular nine to five job, I live in a decent neighborhood, take vacations with the family once or twice a year, and I attribute a lot of that to the savings and investments I started making a while back. Whatever small success I have had thus far has happened through trial & error, lots of self-learning, lots of patience, lots of consistency, and I will be the first to admit, luck has played a big part in my investment journey. And that is what I want to share here, i.e. how can you, an average Joe like me, take control of your own finances, at your own pace and start to build your personalized program for financial independence one day at a time. This is intended to be a layman’s guide for teens and adults alike, from someone who learnt this stuff by doing and is still learning.

Most of the topics covered in the following blog posts come from my regular discussions with my kid. I had to make a sort of learning plan for him and share with him what I know. My strategy with my kid has been to show him the path and let him choose how we would like to go forward. We made some initial investments together so that he could see over a period which ones are in positive, which ones are in negative and together we tried to figure out what should be his investment roadmap for the long term.

Similarly, I will be providing some basic tips and a simple tool kit here, but then it will be up to you on how you use it and how much in depth you would like to go with any particular topic that might sound more appealing to you compared to others. Think of this as my investment biography, and my sincere hope is that you will be able to take at least a few lessons from this and use those lessons in your journey. And if those lessons do help you, then remember to Like-Subscribe-Share! If you didn’t understand the last sentence, then ask your kid or your niece/nephew to explain it to you.

Let me get one thing clear here, if you were hoping for this to be a one-stop shop on ‘how to become a millionaire’ then you are at the wrong place, and at the wrong time. You will find a wide range of videos on YouTube/TikTok/Instagram and there are thousands of books with the claim that if you follow these X number of steps, then you will be on your path to becoming the next millionaire, if not billionaire. But, if you do choose to follow one of those ‘how to become a millionaire’ guide and you do indeed become one by simply following that guide, then please do let me and the others know — perhaps we were at the wrong place, at the wrong time!

There are countless books, blogs, courses, videos, and web sites out there from some of the leading minds in this field, and I went through a lot of that stuff in my early days. In fact, I continue to revisit at least some of those books to validate my learnings or see if I can find some new nuggets of knowledge that I might have overlooked back when I first read those books. But, when I was starting my investment journey, I got really confused and frustrated after reading/listing/watching some of those.

On one hand we have the content creators who go too much into the details too soon, sharing all kinds of historical data, confusing looking charts and ratios and formulas, assuming everyone will understand what they are talking about, or expecting people to have certain level of basics in place already. But in reality, most of it went right over my head or I found it irrelevant for me at that stage.

The flip side of the coin was when the content creator barely went into any details and just gave a helicopter view of everything which left me with the feeling — so what do I do now. It would not be fair to say that I did not learn anything from these, I definitely did. But, overall, I was still stuck with the basic questions — so where do I go from here, what should be my next steps, and how should I get started?

The worst of all this lot was when they tried to sell some online course or tool or something else that would make each one of us an investment guru. These online experts had found some special recipes for making sound investments and have since then become super rich and wealthy and now they are willing to share their secret with the rest of the world for an amazing one-time price of 99.99 USD/EUR for some online course!

Don’t get me wrong here, there’s no harm in investing in yourself to learn new things and specially when it comes to personal finances and investing — this is a tricky and at times complicated area and every bit of help, helps. But do a bit of background check here on what you are spending your money on and is it really going to help you. Just don’t follow the crowd.

My aim here is to share my investment journey step by step and provide some concrete recommendations and actions that you can follow, if and only if you like, and more importantly if you agree with those actions and they make sense to you. I have not found any secret recipe (if there is one), but I have learnt a lot from my mistakes along the way, and I did make plentiful mistakes! Like I said, this was and is my journey and it continues, but it does not mean that you need to do the exact same things.

We all are at different stages in our lives, with different financial situation and background, different level of responsibilities, different appetite for risk taking, different investment time horizon, so you must do what makes the most sense to you and what is feasible for you, but please do something with your money, rather than leaving all of it in the bank in your regular checking account or under your mattress or sofa cushion only to see it lose value (thank you inflation) or spending it all today and not thinking about tomorrow.

A word of caution here, for some this journey will be a bit harder than others or might require more patience and perhaps better discipline, but eventually it will all be worth it.

The following posts will cover individual topics in some detail, but on a high level, these are the different types of investments or actions I have taken thus far to bring me closer to gaining my financial independence:

• Deposit accounts with compound interest
• Funds: Mutual, Index, ETFs
• Individual shares in selected listed companies
• Investment properties

And these are some of the areas that I have not invested in directly and neither do I plan to:

• Real Estate Investment Trust (REIT)
• Anything to do with cryptocurrencies

Later, I will give my reasoning as to why I have not invested in the above. Again, this was and is my choice and I sincerely hope that you will make your own choices. Also, it’s not my intent here to promote one type of investment option as something better than another one, since I don’t believe that such a stack ranking makes sense. There are many examples of individuals — professional as well as non-professional investors — who have made money as well as lost money within each of the investment options mentioned above.

Of course, the most common stories in the media are about extremes, i.e. people who either made bucket loads of money or then those who lost everything. What is not covered in the popular media is the full range of people in between, who made just enough to be satisfied, and live happily ever after.

I have been fortunate enough to be on the positive side overall by spreading my investments, but I know there are many experts who would say that I could have done much better if I had focused on one investment type more than something else. I am happy with how things have worked out for me, and I can sleep soundly at night without worrying about maximizing my returns. In the later chapters I will share my investment portfolio in some more details, but then how you will make your investments is a decision you should make for yourself.

No matter where you start or what you do, it’s very important to acknowledge that there’s always a risk with any kind of investment. There is no such thing as guaranteed success. If someone says otherwise, and tells you about a sure-shot win, or a ‘tried and tested’ method to beat the market, then the best and safest thing you can do for yourself and your money at that moment is to simply walk away and not look back. There are no quick wins to be made here. Period. Of course, the level of risk varies from investment to investment, and more importantly how much effort you are willing to put into doing your due diligence before making an investment decision, but there is and always will be some risk.

It is a bit of an oversimplification, but the rule of thumb in investing is low risk — low reward, high risk — potentially high reward. Don’t go by the ‘fortune favors the brave’ mentality when it comes to your investment strategy and building your investment portfolio. There’s no need or really any valid reason to show bravery when it comes to your money and always going for potential high-reward investments.

A solid and well thought through investment portfolio should have a mix of different kinds of investments, and even within each investment type, you might want to consider investing in different sectors of the market, or even different markets, geographically speaking. Some will make you a lot of money, some not so much, and there will be some investments where you will lose, but if you do your homework well, have some patience, learn to block the unnecessary noise, then you automatically move the odds in your favor and will have a better chance of your investments working in your favor.

The chart below is based on my investment experience, my wins and my losses only. I am aware that many ‘gurus’’ out there might not agree with this, and that’s OK for me. This is how it has played out for me, so this is what I feel most comfortable talking about. It’s very feasible that your risk-reward matrix will look different in a few years once you have built up your portfolio and have gone through the ups and downs of your investment journey. I have been the kind of investor that professionals might call a conservative or a defensive investor. I have maintained a portfolio that is more skewed towards Fixed Deposits, Real Estate and Mutual/Index Funds.

Depending on where you are in your career or how risk averse you are, or what sort of responsibilities you have, or how much time and effort you are willing and able to put into this, you can have a very different looking portfolio, in fact I am hoping that you will have a very different one. At the risk of repeating myself, do not try and copy what I or others have done in the world of investments. You don’t know their full story, their reasons or logic for doing something, so just copying the actions of others without full knowledge or awareness of the background is akin to gambling. It might work in your favor at times, but that’s a strategy I would advise against.

One thing that often keeps people at bay in terms of investment is the notion of risk! How do we know which investment is ‘risky’ and which one is ‘safe’, and on a more granular level, the question could be, what exactly is the risk? For instance, real estate is generally considered to be a safe investment but think about those folks that bought a nice property, their dream home in US in early 2007. Except for a selected few who had the foresight of Nostradamus, no one could have predicted what will happen in 2008. That was the year of the big financial market crisis, or as some call it more aptly, the housing market crisis.

What if you had to sell the property that you bought in 2007, for whatever reason during this period of housing market crisis? That would have meant selling at a significant loss compared to what you paid for the property. Would you consider this risky or perhaps bad timing or just bad luck?

What if you didn’t have to sell the property during the housing market crash? The loss in property value in that case would be only theoretical, since no transaction actually took place. Would we still consider that investment risky? Now what if someone bought a property during 2008 when the prices were down (and many private and institutional investors did buy a lot during this time), and they sell it now when the prices are at record high levels. Would this make real estate investment a safe investment option?

Defining risk and associating it with any investment activity is not a simple thing to do. A lot of risky vs safe discussion boils down to individual circumstances, individual’s action/inaction, individual luck, the ability to maintain calm and composure vs panicking, time in the market and eventually your overall investment goals and targets.

In the next post, I will discuss a bit about the concept of investment goals and what sort of strategies you can adopt that can help you achieve these goals.