The Simplest DIY Investment Strategy To Get You Started

Source: The Motley Fool

Let’s get the disclaimer out of the way: I am not a finance professional, and this is not investment advice. I’m simply sharing my personal experience, so please do your research before making any investments.

Next, before you read on, let’s make sure this information will be relevant to you.

If you:

have never invested in your life
have been thinking about it but have no idea where to start, and every time you attempt to read about it, you feel so overwhelmed by the options that you tell yourself you’ll do it next week
have a bit of cash that you can miss for the long term (minimum ten years)

All of the above — that was me two years ago.

In this article, I’ll go through the steps I took to start investing in Index ETFs.

ETFs have gained in popularity with small-time investors because they’re an easy-to-use, cost-efficient way to reap the rewards of the market. An overwhelming amount of evidence suggests that simply investing in a portfolio of highly-diversified, low-cost index funds over a long period gives you the best odds of building wealth. It’s a strategy recommended by investment pros like Warren Buffett and Mark Cuban.

Now, I’m not denying it will require time and effort to get started. I also don’t mean to downplay the risk of investing. There will always be some level of risk. I’m writing this because I have noticed in my circle of friends that often, people don’t know how to begin, think it’s beyond them, or aren’t aware of options like ETFs.

If you keep it simple and stick to Index ETFs, I have discovered for myself that it’s not as complicated as it looks once you push through those initial barriers.

Step 1: Work on your mindset

I’ll start with some of the misconceptions I had around invested.

I’m not good with numbers

Investing; finance; numbers; horrible math grades in high school; not for me.

I also didn’t trust financial advisors to have my best interests in mind, so going to ‘experts’ didn’t feel like an option.

As always, reading allowed me to see things differently. I read about other people’s experiences and started to feel uncomfortable that I wasn’t doing anything with my money. Whatever I would manage to save would sit there in my bank account.

My favourite book on personal finance is The Psychology of Money by Morgan Housel, who states that:

We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). It’s an important distinction because it means that finance and creating wealth is something that almost anyone can understand and learn, no matter your background, upbringing, education or intelligence.

Basic investing does not require you to be good at math. It only requires curiosity and a willingness to invest time and energy.

I don’t have enough money

All personal finance experts agree that you don’t need much money to start investing.

Why? Because of the power of compounding. If something compounds where a little growth serves as the fuel for future growth, a small starting base can lead to extraordinary results over the long term. Compounding can be so counterintuitive that most of us underestimate how significant the results can be.

Plus, this is not only about how much money you have. It’s just as much about learning new skills and gaining confidence in yourself, which will have a knock-on effect in other areas of your life.

It’s too late

One of the biggest myths about investing is that everybody must start early. This fallacy goes so far that some people never invest at all because “It’s too late to get started now.” No matter where you are — if you can, start now.

In times of low-interest rates and high inflation, the worst thing you can do is to keep all your cash in regular savings accounts.

The ability to stick around for a long time without wiping out or being forced to give up is what will make the difference.

That will be the cornerstone of our strategy: easy to start, small, and in it for the long run.

Here is where I ran into my first stumbling point: feeling like I needed to do more research before I could do anything else.

Signing up for an investing platform will take time, and you will need to fill out paperwork, so do this in parallel with research.

Paperwork, yes. Block two hours on a Sunday, put on some music, do whatever you know will put you in a good mood, and get it done. Just think of how happy you will feel once you have made these investments for yourself.

Digital platforms have made it so anyone can invest with small amounts of money. You don’t need wealthy parents with connections at the bank; you don’t even need a bank. You can do this entirely on your own.

I looked into two options:

Robo-advisor
Online brokerage

A robo-advisor is a digital platform that provides automated, algorithm-driven financial planning services and makes the investments on your behalf. You fill out a survey to determine your risk profile; they propose an allocation (i.e. x% in gold, x% in ETFs, x% in bonds) and invest accordingly.

It’s advertised as being the solution for the under-confident investor.

It sounds tempting to do this, but I consciously chose an online brokerage so I could make the investments myself. I felt it was important to actively engage with the process so I’d understand what I’m doing.

So, start by choosing an investment platform. If you google ‘online broker for index ETF’, you’ll get a ton of articles reviewing and comparing the best options for your country. Don’t spend hours on this — every country has a clear top 2–3 with comparable fees structures, so go with one of those.

I use Saxo Bank.

Step 3: Learn about ETFs

As I said earlier, we will look only at Index ETFs or Exchange Traded Funds.

ETFs offer you a way to invest in a wide range of bonds or shares in one package. They’ll typically track a specific index, like the FTSE 100 or S&P 500. It does this by buying all, or a representative sample, of the assets that make up an index in the same weighting as each asset is given in the index.

Investors in an index fund can expect similar returns to the index itself, making it a fairly reliable, low-risk investment.

For example:

The S&P 500 is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

An ETF like iShares Core S&P 500 gives you access to shares of all the 500 companies listed on the S&P 500, in varying weights depending on the underlying index.

When you look up the prospectus of an ETF, you can see a list of the holdings and the weight (%) for each.

iShares Core S&P 500 ETF Holdings

You can buy ETFs that track a particular index but also specific industries (like Health Care or Cybersecurity) or countries (like Emerging Markets).

The advantage ETFs have over individual stocks is clear:

Immediate diversification: ETFs allow small investors with a limited amount of money to invest in a highly diversified basket of assets. One share of a Nasdaq-100 fund offers exposure to about 100 companies, vs buying one share of one individual company.
Lower risk: an index will usually fluctuate less than an individual stock. Say you buy Zoom shares; you make a bet on the company’s performance, which is very hard to predict. With an ETF, the performance of an individual company is balanced out by all the other companies in the fund.
Low cost: most funds are passively managed, meaning they track the underlying index automatically. This means the fees are much lower than when you go with an actively managed investment strategy where you or a fund manager decide which individual stocks to invest in.

Before you make any purchases, it is important that you do proper research to understand how ETFs work. While they are praised as low-risk, there are many stories of people getting burned because they didn’t do their due diligence. There are different types of ETFs, not all of them are passively managed, with considerable differences in fees and risk ratings.

Step 4: Pick 2–3 ETFs

Here’s our second potential pitfall. There are more than 7,000 ETFs available. We are going to want to simplify the process to make sure we don’t get lost in all the options.

Simply put, this is the process you’d typically follow:

Pick the index you want to track
Choose a fund that tracks your selected index
Buy shares of that index fund

I am not going to advise which ETFs to buy, but for a minimal risk strategy, the general advice is to stick with a World Index ETF of one of the well-known ETF providers like iShares (BlackRock), Vanguard, SPDR, etc. Yes, a world ETF can go down, even by 50%. The beauty is that it is practically impossible to lose all your money. That would mean all companies worldwide would go bankrupt, and there would be no more companies to be included in the index. Pretty unlikely.

Other low-risk ETFs would be the ETFs that track the main stock markets like S&P, Nasdaq, FTS100, etc.

I personally went with these:

iShares Core S&P 500 UCITS ETF
iShares Core MSCI Emerging Mkts UCITS ETF
iShares Automation And Robotics UCITS ETF
iShares MSCI World Health Care UCITS ETF

Compare before you chose. You can use tools like MorningStar and JustETF to compare characteristics and expenses. An ETFs name does not always guarantee the type of investments it includes so read through the prospectus. And lastly, check on any tax implications for your specific country.

Step 5: Define your strategy

It’s good to decide in advance how much you can realistically put aside every month. You don’t want to have to consider this decision every month again, so define a percentage of your income and stick to that.

It goes without saying that you shouldn’t invest if you have any outstanding debts. Pay those off first, set aside a small cash reserve, and only invest the money you don’t need any time soon.

Then, invest that amount every month in your chosen ETFs. The practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price, is called Dollar-Cost Averaging. This approach is ideal for investors like us investing long-term, with minimal market knowledge. Here is an excellent outline of why and how the strategy works.

And then… you buy!

Step 6: KISS

Keep it simple and stupid.

Once you’ve started, it’s easy to start feeling greedy, thinking we need to do more to earn more money. Fight that urge. We generally believe things need to be complicated to work, but in essence, there is great value in getting the simple things right and then sticking with them, and that takes discipline and long term focus.

The goal is to keep this strategy so simple that you have no trouble keeping this up for the next 10–40 years, and so stupid that you hardly look at your portfolio. Sometimes it’ll be up, sometimes it’ll be down. It doesn’t matter as long as you don’t sell.

I ran into the trap of trying a few other things like investing in individual stocks and crypto (Bitcoin and Ethereum). My best returns have been on the ETFs, ranging from 18% to 27% at the time of writing. My individual stocks are mostly down.

My plan for 2022 is to stick to what I’ve been preaching here and invest in ETFs only.

Keepin’ it simple and stupid.