One of the biggest challenges with teaching myself about investing is that there is SO MUCH jargon and terminology. And the experts often seem to forget how little us non-experts know. All the early retirement/financial independence blogs talk about passive investing and index funds. Wonderful. Except that I had no idea what those are. So I would plug the terms into google and promptly be told that an index fund is a type of mutual fund that tracks the market index (Investopedia). Which tells me precisely nothing because I know so little that I don’t even know what a mutual fund or market index is! (I have started a Financial Vocab 101 section where I add words as I learn them, so if you don’t know a term, dear Reader, please just follow the link to avoid yourself [sometimes] hours of googling!).
My other big challenge is that in order to understand or remember something my brain likes to know how everything fits together. I cannot just learn the definition of a term – I need to be able to see the big picture of where it slots in. (As a side note, I recently read Temple Grandin’s “The Autistic Brain” which gave me a name for how I think: Pattern Thinker 🙂 ). So before I can start to feel comfortable with passive investing and index funds I need to understand how they fit into the financial investing world as a whole (P.S. for this section I found these links very helpful:
So let’s start at the VERY beginning. What is an investment? An investment is either money or time that is put into something (a business, a house, the stock market etc) with the aim of gaining some kind of benefit:
The idea is that an investment tends to be done for the long-term, with the aim of my money working for me (as opposed to me only earning money if I am clocking hours). Genius. And definitely something that I want for my life.
So then, what do we invest in? We invest in assets:
Simply put assets seem to work in 3 ways:
- Assets I own
- Assets I lend
However, it seems that in terms of investments (and “my portfolio”) there are three main asset classes that everyone talks about:
- Equities = Stocks = Shares = Stock Market (assets that I own i.e. a part of the company)
- Think of equities as: high risk but high reward
- Technically high risk (because your money isn’t guaranteed as it goes up and down with the value of the stocks).
- BUT there seems to be a continuum of risk: some stocks are riskier than others (e.g. a multinational company vs a startup).
- AND with risk comes higher reward.
- Bonds = Fixed Income (assets that I lend)
- Think of bonds as: dependable income with low growth
- You lend money (capital) for a specified amount of time and in return they: (a) pay you interest and (b) at the end of the specified time give you your capital back.
- Very low risk 🙂
- BUT keeping up with inflation can be a challenge (i.e. you are not going to make a lot of money)
- Aims to provide regular, reliable and stable income.
- Cash and Cash Equivalents (CCE) = Money Market Instruments (cash assets)
- Think of cash as: easily accessible but no growth
- Cash or anything that can be turned into cash immediately (meaning that it has a very high liquidity).
- Used for short-term borrowing or lending
- Seen as low risk (always lots of buyers and sellers)
- THIS is where your emergency fund should be (because you can get immediate access to it)
What’s BRILLIANT about understanding these three terms is that it suddenly means that we can understand what the hell people are talking about when they describe their portfolios 😀 😀 But more on that in the next post.
P.S. We are off to Malaysia for 10 days now so things on The Brat Experiment will be quiet for a while… I hope that you keep well and happy in the meantime, dear Reader.