There is no need to recreate introductions to investment concepts – there are plenty out there online, like napkinfinance.com. Instead what I thought I would do is curate some concepts I feel are important to know on this page.
I start with a few general concepts, then briefly cover some strategies, explain the different assets / investment options, summarise ways you can earning money, and lastly explain a few key calculations.
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Fees are an important consideration when chosing your invesment platform, your financial advisor (if you opt to use one), your asset type/class, our frequency of trading, your bank account, etc. The graph on the left shows the impact of just 1% over 20 years will reduce the potential future value of a £100,000 investment by £75,000. Imagine what difference a 3-4% difference in fees will make!
Investing in different asset classes is a form of diversification, by investing in for example stocks and bonds you reduce your overall risks and reduce the senstivity of your portfolio to market movements. Ray Dalio has shared with Tony Robbins in his books Money: Master the Game and Unshakeable what his All Weather Portfolio looks like.
Due to your portfolio performance (up & down) you’ll need to schedule periodic rebalancing to ensure your overall portfolio meets your asset allocation and diversification targets. Keep in mind that this will attract transaction fees as you buy/sell. I would recommend a quarterly review to assess if rebalancing is required. Without rebalancing your portfolio you may be unwittingly exposed to higher risk.
Short selling (made famouse by the movie The Big Short) is when you bet against the market. A recent example of when people have shorted a specific stock is Tesla – having had some exponential growth from late 2019 to mid-2020 a lot of investors have shorted the stock hoping it would crash to below their short to then make a return on the dip.
Different Assets / Investment Options
Stocks (or equity) is a type of assets in which you can invest in. having bought a stock you effectively own a part of a company (hence the name: share). Having a share will in most cases provide you the right to vote on certain key topics in the company’s AGM (annual general meeting). There are different classes of shares, for example Google has A-class and B-class shares – each coming with different voting rights.
Created in 1976 by John C. Bogle, Index Funds are a collection of shares that track a specific index (FTSE100, S&P500, etc). They tend to have lower fees associated with them as they are not actively traded funds (the top 100/500 firms rarely change). And even Warren Buffett said that after he dies, he recommends that his wife place 90% of her assets in a low fee index fund and 10% in bonds.
Real Estate Investment Trusts (REITs)
REITs are trusts which own real estate (property) and sell shares in this trust to investors. This enable people to buy a share of say a large office building without having to invest millions of Pounds themselves. As property is generally seen as safe asset (apart from the 2007 financial crisis) the returns may be low but secure.
Dividends are a share of the profit a company that is distributed to shareholders. Companies usually don’t distribute 100% of their profit. Dividends are paid quarterly in most cases and you can find the latest declared dividends for the UK markets here. Worth noting that the term ex-dividend means the date up to when a share will be eligible for the next dividend payment, if you buy a share after the ex-dividend date you will not be eligible for the upcoming dividend.
Return on Investment (ROI)
ROI is effectifly your profit/loss ratio on a particular investment taking your income and costs into account. This helps account for other situations where certain investments have higher costs that would otherwise be hidden if taken purely in a return (income) basis, e.g. EPS or Yield.