This is the second part in the two-part series “Time to invest” by LeipGlo contributor Maximilian Georg on investing in the stock market. The content posted here is for educational purposes only and should never be taken as formal financial advice. The views and opinions expressed in these articles are solely the author’s and do not necessarily reflect those of the Leipzig Glocal. Neither the author nor The Leipzig Glocal are liable for readers’ financial decisions after reading the article.
In Part I of this article, I explained why you should invest your money in the stock market. But stock exchanges offer stocks of thousands of companies from around the world. Which ones should you buy? Those that will rise, of course. But which ones will?
In print and online media, you easily find “experts” predicting that stock X is about to boom, and stock Y is about to plummet. As explained in Part I, though, the only thing that is practically certain about the stock market is that it will generally rise in the long run. This means conversely that the general development is unpredictable in the short-run (over the next weeks, months or even couple of years). The development of individual stocks or companies is unpredictable both in the short and the long run. If anyone claims otherwise, why haven’t they become billionaires already buying their miracle stocks?
So don’t listen to short-term or company-specific “predictions” about the stock market, no matter who makes them.
1. Invest in diversified funds
As the stock market will generally rise, the safest way is to invest in the “entire” market. Well, you can’t invest in every single company in the world – but in some thousand or hundred or dozen important ones. The simplest way to do so is to buy shares of a stock fund.
Such a fund collects money from many investors and uses it to buy stocks of many different companies. Traditionally, a fund is managed by investment professionals who continuously analyze the markets and decide which stocks to buy and to sell with their clients’ money. Most actively managed (“mutual”) funds, though, don’t perform better than the wider market from which they selected their stocks.
Therefore, you can make do with a so-called ETF (exchange-traded fund) – a “passive” fund that automatically buys the stocks listed in a certain stock index.
Active human management isn’t necessary, which is why the fees of an ETF (e.g., an annual 0.4 % of your invested sum) are much lower than those of a mutual fund (e.g., 2 %).
A stock index uses certain statistical criteria to assemble a certain number of companies from a certain market. The most famous stock index, familiar from the news, is the Dow Jones, which contains the 30 largest U.S. companies. If you invest in an ETF following (“replicating”) the Dow Jones, you invest in all those companies, in the ratio of their market values. You even invest in the 500 or 3000 largest U.S. companies if you buy an ETF following the S&P 500 or Russell 3000 indexes. Now, if a few of those companies go bankrupt (which still is an extreme case but totally possible), it won’t hurt you because the other companies combined will rise, on average, by a good percentage each year.
By choosing the said three or other U.S. indexes, you diversify your investment in terms of industries within the U.S. economy as well as companies within those industries. To diversify regionally, there are ETFs following indexes such as the MSCI World, which contains over 1500 companies from 23 industrial countries. The MSCI World is complemented by the MSCI Emerging Markets, containing 1400 companies from 27 emerging countries.
2. To go further: invest in long-term trends
If you want to spend as little time and energy on investments as possible, the very broad ETFs described above are all you need. Otherwise, it’s possible and worthwhile to be a little more strategic. Those ETFs without a thematic focus invest in the largest or most successful companies no matter their business or practices. This includes unsustainable and/or ethically questionable businesses such as fossil fuels and arms. You may not want to support either of those with your money, and it may not be good for your returns either.
Instead, you can invest in acceptable or even laudable businesses linked to long-term societal and hence economic trends.
What are these? Entire countries are now working to become more sustainable, in terms of energy, transport, food, etc. More and more things have become digitized and automated. At the same time, people in many countries are getting older and older and thus need more and better medical care.
These and other trends are constantly in the media, and we experience them in our own daily lives.
It takes neither an expert nor a prophet to know that paradigms and processes such as sustainability, digitization, and technology will drive the world in this 21st century.
Consequently, you should invest in fields such as renewable energies, electric mobility, recycling, alternative meat, internet businesses, digital infrastructure, software, artificial intelligence, big data, cybersecurity, robots, innovative medicine and medical devices, biotechnology, etc.
But again, you can’t know which companies from those fields you should choose precisely, especially if the field is still young. A company that’s big today may be long gone ten years from now. Just think of the internet companies from the early years of that technology, the 1990s. How many of those are still on the market? Today, the internet is largely dominated by companies that didn’t exist back then, that weren’t known, or that had a doubtful future.
On the other hand, some of the old internet companies survived and flourished, and new internet companies entered the market with lasting success. Overall, internet companies certainly made money – loads of it. The way to secure a slice of that cake is to distribute your money among many internet companies – by buying an internet-themed fund.
Such thematic funds are increasingly available also in the form of ETFs, but certain themes, or combinations of themes, are put together only by an actively managed (“mutual”) fund. Yet, certain themes may be worth the higher fees.
In any case, check what the provider of your broker account has on offer in that regard and also regarding more general funds. To spread the risk here as well, don’t put all your money in one and the same thematic fund, because it would be too narrow for that.
My choice would be to choose not only one but a few funds. Then buy them with money that you don’t need in the next five to ten years.
This must of course be your own money – never invest borrowed money, because you don’t know how long it will take to get it back with a profit. Over ten years, however, it’s extremely likely for a diversified stock fund to considerably rise in value. Thanks to the long term, it also doesn’t matter when you buy. In the short run, as explained, the stock market is unpredictable even for experts. Therefore, don’t wait for some “low” rate to buy, because you will identify it only when it has already passed.
Instead, simply buy your chosen funds today, no matter how you expect them to develop tomorrow or next month. In five or ten years, these short-term developments will be a small, irrelevant section of a chart trending upwards. The longer you stay out of the market, by contrast, the more of that upward trend you will miss.
The rule is: “time in the market beats timing the market.”
Psychologically, though, if you fear the regret of having bought at a “high” price, you may split your money into several parts and invest the first on the 15th of this month, the second on the 15th of next month, and so on.
And if you don’t have a large sum to invest right now, you can start an investment plan, that is, you buy shares of a fund for at least 25 euros each month. Even small regular investments add up to quite a sum over time, and that sum will rise not only with the market but also through the dividends that many companies pay their shareholders every year. Some stock funds distribute those payments to their shareholders. Others “accumulate” them, that is, they reinvest them in the stocks.
So, go ahead and try it out yourself: instead of losing your money to inflation by keeping it in saving accounts, make it available to companies by buying their stocks (through a fund). The companies will use it to continue and improve the development and production of goods and services for the world. As a shareholder, you thus contribute to the creation of economic and hence societal values, and you will be rewarded for that contribution.