Index investing in stocks ‍ 🎓 So, we found out that purchasing a stock...

Index investing in stocks ‍🎓

So, we found out that purchasing a share actually makes you the owner of a business. It is very important to remember that, unlike bonds, the return on stocks of individual companies is in no way guaranteed. If on a bond you receive a conditional 1-10% guaranteed annual return, depending on the specific instrument, then the range of stock returns for the same year can vary much more, both positive and negative. And yet, over long-term periods (from 10 years and above), as a rule, stocks outperform bonds in terms of profitability.

How exactly do you choose which stocks to buy? First of all, you need to separate trading and investing. Investment is a bet on the long-term growth and development of the company, as a result, an increase in profits per share, and, accordingly, an increase in the price of the share itself. Trading is usually short-term operations, the main purpose of which is to speculatively extract profit from the current market situation. Accordingly, an investment can be called ownership of company stocks from 1 year to infinity, when a person holds positions open for less than several months, as a rule, this is pure speculation. Trading is a separate topic for a long discussion, and we will not touch on it in this blog.

How to choose stocks for investment? Subsequent articles will be devoted to this; here we will look at a very simple, but at the same time effective way for those who do not have enough time and desire to understand the analysis of individual companies on their own, but at the same time want to invest their own savings on more favorable terms than, for example, buying bonds or putting money on deposit. The most important thing in investing is to answer 3 simple questions:

1⃣) For how long are you investing?
2⃣ ) Could you need your savings sooner?
3⃣ ) Are you psychologically prepared for the fact that in the short term your savings may lose 20-30-50, perhaps even 80%?

So, question 1 - if the investment period is less than 3 years, there is no point in getting into stocks. In a short period of time, you may not only not receive additional. income, but also to lose. If you are investing for the short term, look towards bonds and deposits.

Question 2 - obviously, if there is a possibility that the invested funds may be needed for some urgent matters, buying stocks is also not a good idea. Personally, I try to keep a cash amount of funds sufficient to live for 3-6 months, so that in case of unforeseen expenses I do not have to urgently sell stocks.

Question 3 is rather psychological, but this is also an important point. Composure and a prudent character are very important qualities of an investor. If you are investing for the long term, you should not panic and sell assets at the slightest market fluctuations. Ideally, you can buy more at more favorable low prices (not every “drawdown” is a good time to enter some stocks, you need to analyze the company’s business very carefully; stocks can fall for fundamental reasons, for example, in the event of a decrease in business profitability, a sharp deterioration in conditions, etc.).

A striking example from current events is the coronavirus, a virus with a mortality rate of 3%; at the time of writing, just over 3 thousand have died from it in the world. Human. I don’t argue that the consequences of a possible pandemic could be much more serious, but in the current situation in terms of mortality and extent of spread, it is very far from, for example, swine flu. However, the indices of many countries lost 10-30% from their highs on this news.