Six Lessons From Ten Years Successfully Investing My Own Money
By: Michael Yorke
Tags: Money, Finance, Wealth, Investment, Investing

Compound interest is the most powerful force in the universe

Apparently Einstein said that. It’s disputed, but let’s go with it. Compound interest is the effect that a multiplier has on a value after repeated application over time. Let’s say you start with $1,000 and your multiplier (read yearly growth) is 10%. How long will it take your $1,000 to double to $2,000? Ten years surely, with $100 (10%) being added every year?

Wrong. Compound interest accumulates over time, so year one you make $100 to get to $1,100, year two you make $110, year three you make $121 and so on. So it actually takes you roughly seven and a half years. When you’re taking advantage of compounding over 15–20 year plus timescales this becomes seriously powerful for growing the value of your investments.

There are products that can accelerate this further for you automatically such as Accumulation Exchange Traded Funds (ETFs, more on those later). Each time a dividend is paid by the ETF it is automatically reinvested into more shares, so over time not only is the value of your ETF (hopefully) growing you are also accumulating more shares themselves which enhances the compounding effect. As Benjamin Franklin said, “Money makes money. And the money that money makes, makes money”. That’s not disputed.

Fees matter

The worst enemy of any investor other than a Global financial meltdown are fees. And anyway a financial meltdown can be an opportunity (see that Jared Vennett scene). Fees come in many sneaky forms but the main two I can think of are trading commission fees and management fees.

A trading commission fee is typically a one off payment paid at the execution of a trade, so when you buy or sell something. It can be a fixed value or more often than not a % of the trade’s value. A lot of places offer commission fee trading but their fees are baked in somewhere so I’m sceptical.

The really annoying ones that can catch you out are the management fees. If you’re buying something like an ETF it will come with a management fee (more on that later) that usually is a % of the value of your securities charged on an annual basis. These % values are pretty small (e.g. 1%) but we just learned how powerful compound interest is — it adds up and can do some serious damage to your portfolio value over time. Take our $1,000 with 10% growth per year and a 1% annual management fee. Without a management fee after 30 years you’re sitting on $17,450, but throw the fee in and you’re on $13,255… that’s a not insignificant difference of $4,190. Beware the fees.

Invest in what you know

If you work in tech, why are you investing in Latin American infrastructure? I don’t know, and I still don’t. I’m still down on that one after five years… This isn’t novel advice, but invest in stuff you understand. If you get healthcare and finance those are probably the right places to weight your investing because you can make more informed decisions on what looks good and what is worth steering clear of. It’s safe to say that all of my best performing securities are in things I understand in depth and are in things I’m passionate about.

The same goes with the investing products you use. Avoid things like options and leveraged trades if you have no idea what you’re doing. I tried it and I’m still licking my financial wounds from that cash burning foray. I’m sure it’s not rocket science to get your head around how this stuff works but until you have, steer clear to avoid any unnecessary tears.

Diversify with ETFs

Trading shares in individual companies can be time consuming, stressful and generally unappealing, particularly to new investors. What if that company you’ve sunk your money into gets hit by some new regulation, a poor product launch or a top executive bails, sending the share price into freefall? Do you sell, do you wait, do you buy more? These are the sorts of things you can worry less about with products like ETFs.

ETFs are baskets of shares, so rather than buying into one company you might be buying into 30, 40 or 50+. What this means is that the risk of your portfolio is reduced through diversification. If one company has a bad day maybe the other 39 won’t, averaging out the poor performer. You can get ETFs for almost everything as well, based on your interests, risk appetite and if you’re after capital growth vs income generation, so if you grab a few ETFs you’re diversifying your diversification. Nice.

ETFs typically come with a management fee because you are literally paying someone to worry about that other stuff for you. All that said, well performing ETFs with low-ish management fees can be an absolute steal and are a generally low(er) risk and hassle free way of turning your pennies into pounds.

Just have a little patience

I can’t remember which fund this came from, but this slightly morbid quote sums up how to approach investing so well; “Our customers with the best performing portfolios are those who have forgotten they have one with us and those who have died.” Basically just don’t touch your portfolio and chances are it’s going to increase in value. It’s easy to get emotionally attached to your money and want to sell as soon as there’s a whiff of a downturn, but you need to abstract yourself away from the daily, weekly, monthly fluctuations, global pandemics and renegade presidents and have faith in humanity and capital markets that the value of your investments will increase in the long run.

If you need more encouragement, between 1928 to 2015, the S&P 500 returned an average of 9.5% per year despite the Great Depression, Black Friday, the dot.com Bubble and the GFC.

With this in mind it’s worth thinking about why you’re investing. If you’re after short term gains then it might not be the smartest thing to do but if your end goal is a fair few years away and you don’t need the cash until then securities can be a great place to put it to work. It’s over time that the compounding effect really does its thing as well, you’re not going to see much benefit from that after only a couple of years.

It’s never too late to start

Contrary to popular belief investing is super easy to get into. Many people have asked me where to start, or whether it’s even worth it because they don’t have much to invest. The answer is most banks have a securities trading arm where you can set up an account through online banking, and yes it is worth it. There’s also newer bank apps like Revolut that allow you to trade, and then specific products like Nutmeg, Robinhood and eToro (I’m not advertising, these ones just spring to mind) that give you access to markets and investing features.

Sometimes getting started is the hardest part because without a big initial investment the projected returns aren’t all that attractive. If I’ve got $50 and I make 10% this year I might as well just not buy a coffee and make the same return. True, but what about $50 one month, $75 another, maybe $100 the next, and you quickly start to build investing habits that can be further encouraged as you see that small pot grow and grow. It takes time, patience and discipline yes, but any start is better than no start at all.