We already discussed about how to determine how much money to invest, considering your financial situation and your risk tolerance. Let’s stick to the example that we have already reviewed, and assume that you are willing to invest 200€ monthly. But how to get started investing?
Choose a cost-efficient broker
The first thing you will need to start investing your money is a brokerage account, to be able to buy and sell stocks, ETF’s, commodities, cryptocurrencies, or whatever you would like to invest in. The most important topic to consider, before choosing a broker, are the fees charged on buy & sell orders. Especially if you consider investing small amounts of money, high fees can trim your investments tremendously. Fortunately, today there are many options to choose from and some brokers are providing a great deal to their customers, e.g. charging any fees, or at least offering to buy specific stocks or ETF’s free of charge.
To begin, I recommend you to take a look at your local bank, were you currently have your bank / savings account. If they offer an online brokerage service, with low order fees and maybe some stocks or ETF’s, that are offered to buy free of charge, or that can be included in a savings plan, with monthly payments free of charge, this is a great starting point. The advantages are, that your brokerage account will be linked directly to your bank account, with great flexibility and accessibility. Furthermore, this is a trustworthy solution, as you might already have long-term experiences with your bank and a contact person, with which you can get in touch in case you experience any problems.
A mobile broker or social trading platform usually offers a great deal, charging low or any fees, and providing great user experience. This would be my second recommendation, if your local bank does not offer a brokerage account, or if the terms and conditions are not satisfying. The only downside from my point of view is the reduced flexibility, as you need to deposit money first and wait for it to arrive in your account, before you start investing (same for withdrawals).
What I do not take into consideration to compare different brokers are:
- The tools they offer to analyse a stock (e.g. corporate key figures or tools for technical chart analysis). If you search the internet, you will find plenty of tools to use, that are free of charge and offer great possibility of analysis.
- The amount of different markets / stock exchanges that can be accessed. If you would like to invest in very exotic stocks, that are only traded on specific markets / exchanges, you might need to choose a special broker, which is very likely charging higher fees. But the question is if this is necessary – I don’t think so.
Take your time to check out the different options and their reputation using review pages. Low fees will pay off. But in any case, you will be able to transfer your portfolio to another broker at a later stage, if necessary.
ETF’s are a great choice
Besides investing in individual stocks, investing in ETF’s (Exchange Traded Funds) is a great opportunity to start investing your money. ETF’s combine a high amount of different stocks from companies of different market segments into one security, while they replicate an index, e.g. the S&P500. This means, by buying one share of an ETF you will invest in all companies that are part of the index (in case of the S&P500: 500 different companies from different market segments).
The advantage of doing so is obvious, you will benefit from the overall market development and your portfolio is well diversified, although you are only buying one security. Furthermore, in case one of the companies claims bankruptcy, or one of the market segments is struggling due to a crisis, the downside of your portfolio is limited, due to the fact, that other companies / market segments are still performing well. But, if you buy individual stocks, you only rely on the performance of these companies / market segments, which could lead to a total loss in the worst case. Think about the travel industry, that was significantly affected by the pandemic this year. If you had invested your money in these companies beginning of 2020, your losses would be significant (60-70%). The same amount of money invested in an ETF, replicating the S&P500, actually would have made you profit.
In addition to that, the overall volatility of an ETF is less compared to stocks, and ETF’s are often offered to be traded with lower order fees. Due to that, I highly recommend them for beginners, but also in general for a solid long-term investment strategy.
If you would like to invest in an ETF, you will find plenty of different options. A great website to compare them is http://www.justetf.com. But what are the most important characteristics to compare different ETF’s?
First, of course the index the ETF is replicating. There are hundreds of different options, e.g. to buy an ETF which is based on the S&P500, Nasdaq, Dow Jones, DAX, Euro Stoxx 50, MSCI world and many more.
The total expense ratio (TER) is a measure of the total costs, that are associated with operating and managing the fund, and varies in a range of 0.05% to as high as 1% annually.
The fund size is a measure of how much money is invested in the ETF, but also a measure of how much liquidity is provided in the market.
The date, at which the ETF was listed in the market for the first time.
Stick to solid standard indexes and don’t buy any ETF’s that are covering some sort of niches. Why? Because usually these niche products charge higher fees and the fund sizes usually are small. And there are two important disadvantages related to small fund sizes.
- The smaller the fund size of an ETF, the more likely it is, that the fund is not operated profitable and will be closed at some point in time, forcing you to swap your investments to another ETF.
- A small fund size accompanies with a smaller trading volume and thus less liquidity in the market. In some cases, this leads to poor accessibility to the market, for example in case you would like to sell your ETF quickly. If nobody is interessted to buy this ETF, you will not be able to sell your position, or maybe only at a bad price.
ETF’s are a great product for passive investments. If you would like to invest actively in trends / market niches, I would rather recommend you to do more detailed research and directly invest in the most promising companies from these market segments.
If you compare two ETF’s with similar TER, I would always recommend choosing the one with bigger fund size. Moreover, I usually invest in an ETF that was listed in the market at least 3-5 years ago. Otherwise it does not provide sufficient data about the ETF’s historic performance.
Define and stick to your strategy
Keep it simple and start investing your money based on a monthly savings plan, which will invest your money automatically into 2 or 3 solid ETF’s. This passive approach will reduce your personal effort to nearly zero, after everything was set-up once. Moreover, if you only invest a small fraction of your monthly income, you can basically forget about it and stick to your strategy over a decade or more, to watch your investment grow over time.
An ETF that replicates the MSCI world index is a great starting point. The MSCI world is one of the most common indexes in the world and includes more than 1600 different companies from 23 different industrialized countries, mainly focused on North America and Europe. It combines all major business segments like the energy sector, health care industry, financial institutes, consumer staples, commodities and chemical industry, the information technology sector, real estate companies and more. Thus, the MSCI world provides maximum diversification and there are a lot of ETF’s available, with huge fund sizes and very low TER.
As the MSCI world index does not offer a great allocation to developing countries, you can add a second ETF, which replicates the MSCI emerging markets index. The MSCI emerging markets index is a counterpart to the MSCI world index, but includes around 1400 different companies from 26 developing countries, mainly focused on Asia and South America.
By investing your money in these two indexes, you will basically own fractional shares from companies from all over the world and you will benefit from the overall worldwide economic growth. Diversification is massive, thus even if one of the market segments, or one of the country’s economy is struggling your downside is limited and your portfolio is well balanced.
To simplify it even further, you could also choose an ETF replicating the MSCI all country world index (ACWI). This index combines both, the MSCI world and the MSCI emerging markets index, including around 3000 companies from 23 different industrialized countries and 26 developing countries. But the downside is, that you will not be able to adjust the ratio between the amount of money invested in industrialized countries and developing countries. Currently, the share of emerging markets in the index is only 12%.
In terms of our investment example of €200 monthly, I would recommend to weight the allocation between the MSCI World vs the MSCI Emerging markets to 70% vs 30%, or to invest €150 in the MSCI World index and €50 in the MSCI emerging markets index.
A great example for an ETF which replicates the MSCI world index is the iShares Core MSCI World UCITS ETF USD (Acc), IE00B4L5Y983. The ETF was listed in 2009, has a fund size of incredible €21 billion and a TER of 0.20% per year.
A great example for an ETF which replicates the MSCI emerging markets index is the iShares Core MSCI Emerging Markets IMI UCITS ETF (Acc), IE00BKM4GZ66. The ETF was listed in 2014, has a fund size of incredible €12 billion and a TER of 0.18% per year.
In both cases earned dividends are reinvested into the funds, which is great to benefit from compound interests long-term and the annual costs are very low.
If you believe in the further growth and outperformance of companies in the tech sector, it could be an option to add a tech-oriented ETF too, e.g. replicating the NASDAQ100. But as a lot of these companies are already included in the MSCI world index, I recommend to keep the allocation to this additional ETF rather small, to not overweight this market segment in your portfolio.
If you would like to learn about typical stock market terms, before you Place Your First Trade, please follow my next post in the category “Investing 101”.