Table of Contents
I’ve gotten the question of how to start investing many times over the 3 years we’ve had this channel.
So I thought – why not do an entire series of blog posts to guide the average person to start investing.
This should cover almost everything. So if you’re someone with absolutely ZERO knowledge about investing, this is for you.
It’ll probably be split into 5-6 different blog posts, so stay tuned for weekly posts.
Let’s start with the fundamentals – an introduction to investing.
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What is investing?
The most basic way of explaining this is – investing is putting your money to work in the hopes of generating positive returns.
What kinda positive returns? I’ll share that later.
But think about it this way.
Your best friend makes the best avocado and toast you’ve ever tasted in your life. You tell them why not turn this into a business?
Their response is that they were thinking about it and have a solid plan but just don’t have the cash for it.
So you give them $10k to do it but in exchange you’ll own 20% of the business.
The business grows huge and McDonald’s wants to buy it for $1m. Your 20% is now worth $200k so you sell it off and enjoy your gains.
That’s investing. You put your $10k to work, it helped grow a business, and you reap the rewards of it.
How do you make money from investing?
Usually, the money you make from investing comes in only 2 forms – capital appreciation or dividends.
Capital Appreciation
This one is straightforward. You invest in something, and the value goes up. Just like the avocado & toast company I was talking about earlier.
If you invested $1000 into Apple shares in 2000, you’d have $205k today.
Sigh.. blaming my parents for this one.
It’s important to note that you won’t actually see any money going into your bank account.
The value of your stocks just went up and you won’t see the cash until you decide to take the profit by selling it.
It’s like owning a house. Just because the price of your house went up 2x doesn’t mean you have 2x more money in your bank account now.
You’ll only enjoy it once you decide to sell.
Interest / Dividends
The second way people make money from investing is in the form of dividends or interest. There’s many names to this and it can be slightly different but generally it’s just the same thing.
I’ll call it payouts.
For Malaysians, the best example of this would be ASB. They just payout a certain amount of money to us every single year.
Interest you earn for leaving cash in a bank account, putting cash into fixed deposits, or investing in money-market funds all fall under this category.
This is also very common for dividend-paying stocks. I’ll go back to the example of Apple since they pay dividends now – even though it’s very little.
This is their dividend payout history. For example in August 2023, they paid you $0.24 in dividends for every share that you own.
This cash actually goes to your bank/brokerage account, unlike capital appreciation where you have to sell.
It’s the reason some people like dividend investing, money just flows into your account.
So this is a good example of the 2 different types of returns you can expect from investing your money.
Apple stock goes up – Capital Appreciation
Apple declares dividends – Payouts
Why it’s important to invest
Most of us are salaried employees. We get our pay every month, spend a portion of it, and hopefully save the rest.
If you manage to save a good portion of your income you can actually end up doing pretty well and having enough for retirement.
But how much can you really save?
Let’s say you want $1m by the time you retire at 55, and you’re 25 years old now.
That means you need to save $2,777 every single month – starting from now. That’s… difficult to achieve.
What if you invested that money at 6% returns instead – how much do you need to invest every month to get $1m in 30 years time?
Only $994 per month, or 36% of what you needed if you just saved it in a bank account.
Or if you invested that $2,777 every month, you’d have $2.8m instead of just $1m.
Like they say, you won’t get rich by just saving your money.
Investing is really the easiest way for the average person to grow wealth. I don’t think there’s any other way that comes even close.
Everyone can invest their money these days with so many options out there. Yes rich people get access to special investments but honestly we don’t even need it.
The investments that everyone has access to are good enough for us to build wealth over the long-term so there’s no actual barrier to it.
The power of compounding – why the earlier you invest the better it is
On a similar note, the earlier you can start investing the better it’ll be.
And I don’t mean better as in instead of getting an A- on a test you get an A+.
I’m talking about hundreds of thousands of $$$ kinda difference if you just start investing earlier.
This is all thanks to the power of compounding.
Even Albert Einstein talked about how compound interest is the eighth wonder of the world.
Idk if its true but I got this screenshot from Google so it must be true right?
Anyway, let me show you how this works in numbers as well.
Example 1
Today you have $0.01. Everyday you will double your money. How much will you have in 30 days?
$100? $1,000? More like $5.3m
On the first day you double its only $0.01. On day two its only $0.02. But on day 30, your double is now worth $2.6m.
Now obviously we won’t double our investments every day, it was just to illustrate the effects of compounding. But let me show you a more realistic example.
Example 2
Emir & Edly are 25 years old and both want to retire at 55. But Edly wants to enjoy his 20s. He’ll start investing at a later age, it’s fine.
Emir – invests $10k a year from 25 but stops at 45
Edly – invests $10k a year from 35 all the way to 55
So Emir started investing earlier than Edly but both of them invested the same amount – $10k a year for 20 years for a total of $200k.
What’s the difference in their portfolio values at 55?
At 55
Emir – $698k
Edly – $390k
Even though they invested the same amount of money, Emir got an extra $308k or 79% just by investing 10 years earlier.
That’s the power of compounding. So start investing as early as you can, it’ll literally make a huge difference.
Set your investment goals
Last thing I’ll touch on in this blog post.
All those numbers look good, but think about what you’re investing your money for.
It could be for something short-medium term like saving for a holiday, a wedding, or just saving up for your kid’s education.
Long-term goals would usually be retirement and most people should already start planning for that from a young age.
Depending on your goal and how far away it is, there are different asset classes that you can invest in which I’ll write about in the next blog post!
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