Investing for Beginners

7

Posted by jamie | Posted in -Featured-, Investment, Personal Finance | Posted on 29-06-2009

After lots of requests for information on investing while in Japan, I’ve decided to write a very basic introduction. This time I’ll be looking at managed funds, which is probably the easiest way to get a good return on your spare income with minimum of effort over a long term. Of course, there are other investment options – stocks, foreign exchange trading – but they require far too much effort and you’re just as likely to lose money unless you really know what you’re doing.

THE ABSOLUTE BASICS:

A managed fund means you pay money into your fund every month, usually a minimum of around 40,000 yen. When you start your investment, you must choose when your investment will mature – for instance, 5 years, 10, 25 years. You can however make regular withdrawals from the fund before the maturity date (but not recommended). You must make minimum payments every month for at least 18 months from the start – after which you can adjust the payment amount, or take a short break, or start to withdraw money. So if you know you’re going to be teaching English for at least 2 years, now would be a fantastic time to start. That’s the basics.

START NOW:

The most important thing is start investing early.

If your 20-25 years old, this may seem a little ridiculous to think about finances and totally something you can leave until later, but if you want to be financial secure later in life then start now – you too can be a millionaire if you just start investing that money now and get a head start on the rest of us. Have you thought about totally awesome it would be to be able to say you’re a millionaire by the time you’re 40 – well that’s really not such a crazy preposition once you look at the numbers.

For my age group, 26-30, you probably already feel some impending sense of doom that you’ve managed to save up very little money over the last 5 years of life, and even if you have saved something up then keeping it in the bank here is less than worthless (in fact, your money is just slowly losing value on a global perspective), so it’s about time you think damned seriously about some lifestyle changes and definately start investing now.

If your over 30 and still not investing, then you’ve missed out on a lot of compound interest that you could have made if you’d started earlier, but luckily you should be earning more than these young’uns so your best bet is to start investing now with a higher amount each month.

Either way you look at it, you need to start now.

“The most powerful force in the universe is Compound Interest” – Einstein

The key point about starting early is the concept of compound interest. If we assume we’ll be making a certain profit on the money we invest, then each year that our investment is sitting there it will be earning interest on the money we put in (the principal) plus the interest we earnt last year. So let’s say you put 10,000 into your investment fund right now, and just left it at a rate of return of 5%, for 50 years~ that 10,000 would have transformed into 115,000 yen when you took it out 50 years later! The power of compound interest!

Let’s look at a more concrete example, using 8% – a fairly standard rate of return for a managed fund investment.

I invest 50,000 yen per month from age 21 for a total of 10 years. After those ten years, I just let the investment sit there until I’m ready to retire at age 41 (!).

My hippy friend who frivolously spent his 20’s touring the world, playing in a band and drinking various beers decides that finally, at age 31, that he should probably start thinking about his fincancial future and invest. With a good job he can afford 100,000 yen per month and is also hoping to retire at 41.

As we both reach age 41, my investment is worth 20,300,000 yen. His however is only worth 18,700,000 yen. Even though he paid twice as much as me into his investment for the same amount of time, I’m 2 million yen better off. Read that again if you need to.

Of course, if this were a real world example I wouldn’t have stopped after 10 years. More likely I’d have kept investing 50,000 yen a month for another 10 years, or even more if I could afford it. In that case, when I hit my 41st birthday my investment would be worth a cool 30 million yen, even though I invested the same total amount as my friend.

The point is that aren’t many things in life that make you money just with the flow of time. An investment is one of them, and the most important thing is to start early!

WHAT ABOUT THE RISK?

There are so many risks involved with investing, that’s why you have to sign things that say your investment may decline in value as well as increase! It’s a fools game – you’re better off putting the money in a box under your bed!

Whatever. I’ll be totally honest here and tell you that right now, in this horrible economic climate – my investment is actually worth less than the amount I have paid in. But do I care, am I worried? No – not one bit, because in the long term all these minor economic “crisises” fizzle out. When the economy recovers again, my investment will recover with it. A lot of people will pull all their money out at this point – cover their losses and run – but that’s about the stupidest thing they could do. That’s why you invest over a long term. The cycles of economic ups and downs always correct themselves as history as shown time and time again.

Unfortunately – despite what critics think – the same is not true for the current environmental crisis. Global warming is happening and it is not simply a natural cycle – which is exactly why I choose to invest my money in clean energy developments!

THE POWER OF INVESTING IN A FOREIGN CURRENCY:

In fact, my investment is doing even worse now because of the fact that it’s in American dollars! “What a stupid decision that was!”, you might think – but not so. In fact, any clever frugalista will realise that right now the dollar is cheap, and my yen can purchase more dollars to put into that investment than it could last year – so if anything, now is the time to pay MORE into my investment account! Do you really think the dollar won’t recover in the next 20 years? At which point, I will have made even more profit by leveraging the power of investing in a foreign currency while it was cheap! On the other hand, if the yen ever devalued to something ridiculous, I could just reduce or even stop payments until it recovered again.

YOU MENTIONED CHOOSING FUNDS?

Yes – the type of investment I’m referring to here is called a managed fund. This is where you allocate your money to a particular fund. That fund, or pool of money, is managed by someone who chooses where to invest it – given the objectives of that fund, the level of accpetable risk and the likely return. Each fund will perform independently, so the more funds you distribute money to then the safer your investment will be. Each fund has a certain level of risk – high risk funds could make as much as 15-20%; medium risk around 10-15%; and low risk about 5%.

Personally, I want to make sure my money is invested morally – so the majority of my fund goes to high risk emerging energy technologies and biotech industries. Despite being high rish, I believe that it was a morally good choice to support renewable energy and I believe that in the coming years those industires will boom. Land or gold based funds or usually fairly safe though.

You don’t really have to do a lot of research when you start investing – just check the current list of funds on the website and pick out some that sound appealing to you for whatever reasons you have. You can redistribute your funds at any point at no extra charge if you change your mind.

Oh, and one more thing. If you make your investment payments through your credit card, you’ll be getting an additional 0.5-1% back in cash or points! For me, this works out to about 10,000 yen free every year, which I can then re-invest!

And that’s pretty much it. Bear in mind, I’m no financial manager. But, I do know that getting your finances in order and beginning your investment right now are the keys to being financial secure later in life. There are some great financial management software packages  out there but, I would like to recommend my personal investment manager Matthew Murray, who writes the financial column for the Hiragana Times, so if you’d like to get in touch with him directly please drop me an email or use the form below and I will forward your details onto him. If you have any questions you think would benefit everyone, please write in the comments section too!

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Comments (7)

While I fully understand your desire to invest morally, it is important for the general reader to understand that doing so — at least using the approach you suggest above — also takes on a lot of risk. You mention that you understand your plan is high risk. However, I do not think that advice is sound for a beginning investor, who may not have much to invest, and who likely will not understand the risk/reward calculus involved for any one investment.

A better alternative would be to invest in an index fund, which essentially buys the whole market. There are many that have very low fees. I would suggest your readers research index funds in addition to those you suggest above. I would also suggest that they read up on “diversity”, as diversification and diversity of investment is important to limit risk exposure.

I wouldn’t put any money into a managed fund unless you have good reason to believe in the manager. Here’s why:

On average, half of managed funds will beat the market, and half of them well do worse than the market. Managers cost money so when you take costs into account, the probability that you will choose a manager that beats the market is less than 50%.

Instead, for long term investments, I would choose an index tracker. Index trackers don’t have management fees and will track the market exactly. Therefore, on average, an index fund will do better than a managed fund.

If you’ve got good reason to believe in the manager then that’s fair enough but if you haven’t got a clue, it doesn’t make any sense.
.-= wrightak´s last blog ..What’s the point? =-.

Awsome article. Bookmarked for future referrence

Interesting article i totally agree with the comments above. Keep writing !!

Good work, keep us posting, you are good writer!!!

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