Must-reads
- The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, Michael LeBoeuf
- ETF Investment Strategies: Best Practices from Leading Experts on Constructing a Winning ETF Portfolio by Aniket Ullal
- Index Investing for Dummies by Russell Wild
A conveniently low effort and effective way to grow your money is by investing in index funds. A type of index funds you should consider are exchange-traded funds (ETFs). The funds consist of shares weighted in proportion to their market size. You reduce risk by investing in a lot of stocks instead of putting all eggs in one basket. Surely, you’ll miss out on huge multiplications, but you’ll also avoid huge losses.
Buy and hold is the strategy you want to use in purchasing index funds. It is as simple as it sounds: buy the funds monthly, and keep holding onto it until you need it (at retirement, for example). Don’t try to time the market, just mark a monthly task in your calendar to buy the stocks, or even automate this process. A common saying in investing is ‘time in the market beats timing the market’. Sometimes you buy on a high price, sometimes you buy on a low price, and eventually this price will average out.
An individual has to invest an unreasonable amount of time in stock selection to have a chance of profit. A smart individual applies an exaggerated Pareto principle here by recognising index funds as a less than 1% of time investment for a more than 80% results strategy. After an initial investment of your time where you educate yourself on using index funds and set up an investment account, the strategy takes a negligible amount of your time. Buying 1-3 index funds each month is a matter of minutes (on the conservative, slow side).
Avoid actively managed funds as you’ll basically pay the funds managers to wager your money for you. The managers charge a fee for constructing and maintaining a portfolio of stocks. Index funds automate this process by simply tracking the current market and buying or selling shares according to the publicly available state of the market. Management costs for index funds are much lower than those of actively managed funds. Even a 0.5% difference in management costs can eat away a sizable portion of your 6% interest.
Some people like to actively manage their holdings and pick individual stocks. Gambling is fun to some folks, but it should be seen as just that: a pastime for your amusement. Expect to lose all your money with your hobby and be fine with it. If you’d like to gamble with stocks, keep it under a preset boundary such as a few thousands euros or a low percentage of your total money invested.