#009: Personal Financial Planning and Investing
Where to start and what to aim for? My simple recipe.
Everyone who works in exchange for receiving money typically does it because he or she needs the money.
Otherwise we would probably stop working or work on something different.
However, putting your hard-earned money at work is what most people neglect.
Unfortunately, most people think investing still is a complex matter that is only accessible to the ones with deep financial knowledge.
Financial planning is all about understanding what to do with the money you have left.
The simplest solution is to just keep it where it is — on the bank, under your mattress, in your pocket or wherever this place may be.
However, due to the phenomenon of interest rates, appreciation and depreciation of assets or inflation, it is worth thinking carefully what to do with the money you have left.
Even more if your time frame is a multi-decade horizon.
Ownership vs cash
Some options to consider if you have cash left are:
Put (or leave) the cash on the bank:
There you’ll get low interest rates and you have to pay management fees which are typically flat fees.
Invest in stocks:
Returns (positive or negative) depend on the related company’s performance, industrial sector as well as the macro-economic environment. It is not recommended to invest all cash in the same company or industrial sector.
Invest in ETFs:
ETFs (a.k.a. exchange-traded funds) are funds that consist of a collection of stocks and bonds and can be purchased as easily as stocks. A very popular category of such funds are index-ETFs. They hold the same securities in the same proportions as a certain stock market index or bond market index. As they typically aren’t actively managed they have low trading fees.
Invest in bonds:
They are considered “safer” than stocks but generally provide lower interest rates than stocks and stock-ETFs.
Invest in natural resources:
You can invest in gold, oil and other natural resources. However, these types of investments’ returns depend heavily on supply and demand mechanisms which are related to complex macro-economic conditions such as the geo-political situation, supply-chain mechanisms, etc. For non-experts it is not trivial to understand how these prices evolve long-term. In my opinion neither for experts this is possible.
Invest in real-estate:
Besides buying your own home, nowadays it is possible to co-invest in property or real-estate projects. However, this asset class is less liquid than above examples and accessibility to those investments is still not as straight-forward as for stocks, bonds and ETFs.
Invest in high-risk / high-return investments:
Examples of such investments are (early-stage) startup investments or Crypto investments. If you do consider buying such assets I always recommend to exactly understand the potential risk involved. Read my post here where I describe in detail my approach regarding this topic.
Time frame and risk are often 2 sides of the same coin
If you start investing you should be very clear about the time frame you are considering.
For instance, let’s look at the performance of the ETF “Vanguard FTSE All-World UCITS“ which is one of the most popular ETFs among retail investors:
If you had made a large investment beginning of March 2020 when the global Covid-crisis was unfolding you would have made a very nice profit by today.
However if you wanted to sell in April 2020 you would have made a massive loss. But if you bought end of April 2020 your profit today would be significantly larger than if you invested 2 months before.
As we can see from this example, the average year-over-year performance over a long time frame (e.g. several years or even decades) can be very attractive for a certain investment while the year-over-year performance in a particular year can be poor.
Thus, you must clearly understand what your time frame for investing is.
Long-term investing for beginners or lazy people
When I started investing I basically had zero clue about the topic.
My criteria where:
- Long-term investing to generate passive income that is higher than just holding cash on the bank;
- As little regular involvement as necessary from my side;
- Low fees;
- Optimal performance with moderate risk.
I applied a simple rule of thumb (which I still apply today) which states that the percentage corresponding to bonds you hold should correspond to your age.
Today I am 36, so I am aiming at holding 36% of my net worth in bonds.
Most of the bonds I hold correspond to my pension fund managed by my current employer.
The rest I invest in stocks or stock-ETFs, which corresponds to 64%.
Thereby, I aim at investing 15% in stocks of companies of my home country, which is Switzerland and the rest (roughly 50%) in global stocks.
The reason for this diversification is the risk you need to manage if you invest in companies that make their money or issue stocks in a currency not equal to the one you earn your money in.
Thus the simple split I am currently aiming for is:
- 36% bonds
- 15% Swiss stocks or stock-ETFs
- 49% global stocks or stock-ETFs.
This was how I started investing.
As some ETFs are very diversified, I actually started out by just buying 3 ETFs for several years:
- 1 international index-ETF (as the example shown above) representing a diversified and global stock portfolio.
- 1 Swiss index-ETF representing a diversified Swiss stock portfolio
- 1 Swiss bond-ETF
Now that I am a more knowledgeable than when I started out, I actually also invest up to 5% of my net worth in high-risk / high-return assets as well as in specific individual stocks.
Additionally, I keep a fixed amount of cash on the bank for emergencies or quick short-term expenses.
An important note to consider:
The split I am aiming for is what I want to achieve over time.
It is not recommended to take your entire cash of today and invest all at once (even with the split described above).
Imagine the market crashes tomorrow: then you’ll loose a lot of value short-term.
If you start investing, rather consider to buy assets over a time frame of several years until all your cash is invested.
Key takeaways
- Understand your time frame when you start investing.
- Keep it simple, then observe and learn over time. Start with 1 -3 index-ETFs.
- Never invest all your money at once. Invest regularly over time.
Don’t miss the next newsletter if you want to get more actionable insights on how I optimize my life.
Disclaimer
The views expressed here are those of the author. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, the author has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest. Any investments or companies mentioned, referred to, or described should not be considered as investment recommendation, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.
