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birb_cromble  4d ago (text post)   1362 thread views

Weekly Finance Thread

Since a lot of us here have expressed interest in not starving to death in a gutter, I figured I'd start a weekly thread to discuss financial matters.

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Let's say I managed to save up around 5000€. Is there any point in investing a sum that small? What if we also assume that another 5000€ join it every year?

Yes, it's worthwhile comparing to losing $ due to inflation

Invest - yes. Simplest investment is a savings account (not sure how they are called in Europe?) - you give your money to the bank, the bank pays you money for that. If you're not going to touch the money for a while, it's a no-brainer. But, of course, the profit you can gain this way is not large - in the US, for a short-term account (where you can take the money out anytime) it's about 3.5% per year, for longer terms may be more but not much. E.g. US Treasure I bonds now pay 4.26% but you have to keep the money there for a while (minimum 2 years). Certificates of deposit are offered by most banks and have varied terms and interests, but the idea is the same. If you limit yourself to respectable large banks, the risk is pretty much zero here.

The next step is stocks - here you can make more, on average 8% per year, and the simplest way would be to invest in a market-wide index fund. You should look for low-expense funds. With 8%, you'll more than double your money in 10 years. Of course, the risk is that stock market is volatile, so while on average it goes up, there could be long period - even years - when it's down. And unlike bank deposits, nobody guarantees you safe investment.

So, overall, yes, there is a point to invest money you're not using. How depends on your risk tolerance and time horizon. I'd avoid complex strategies until you understand them well, but even if you don't want to go into the weeds, it makes sense to invest at least in simplest ways. You would not make the maximum profit, but you would make some profit, which is better than just leaving the money to collect dust and earn nothing.

Is there any point in investing a sum that small?

I would personally say yes. Every choice you make with money is an investment; the only difference is the return.

If you're talking about equities specifically, it's a more qualified yes. Are you willing to lose it? Can you afford to let it sit there locked up in the market for years if the economy is flat? Can you think of a better use for it (eg: home down payment, paying off expensive debt)? If the answers to those are yes, yes, and no, it's usually a good choice.

To be very honest, I don't even know what equities is. Or are. I am, as they say, financially illiterate beyond "penny saved > penny earned".

My answers are

  • Willing to lose (entirely): No.
  • Can afford to let it sit: Yes.
  • Better uses: No.

Put simply, there are broadly two ways to invest:

  • Loaning somebody money who will pay you back (also called the credit market or debt market, sometimes casually referred to as bonds)
  • Buying a (usually) tiny ownership share in a company (equities, most commonly represented by stocks).

When most people talk about "the market", they mean common stocks or funds on public exchanges. It has historically offered the best long term return on investment, but it carries the most risk. Stocks tend to grow, but that's a trend that can't be applied with certainty between any two specific points in time. In a bad year (eg: 2008), you might see the face value of your investments drop by 50% and take several years to recover. If you pick individual stocks and you're very unlucky, every single company could go out of business and cost you everything. You can mitigate those risks by buying into funds, which are baskets of multiple stocks. They won't all be winners, but it spreads the risk at the cost of some potential returns.

No one is forcing you to sit through a full crash or the bottoming out process. Stoplosses exist. Always pre-define your risk.

Those can kill you by a thousand paper cuts. IMO risk management is better done with appropriate sizing and asset allocation. Things like stop-losses or puts add completely different risks and performance drags. And since 2010 a lot V-shape recoveries especially at the index level.

In some way you have to establish a positive risk/reward ratio that does not rely on luck. Everyone will have losing trades. Anywhere from 30 to 70 percent of the trades will be losers, depending on the criteria you have established, and the market cycle and skill and chosen method (daytrading and swing-trading is much harder to pull off with a decent hitrate than position-trading).

Depending on your hit rate, you'll need at least 2:1 or 3:1 bigger gains when you are right, compared to the losses when you are wrong.

A 33% drawdown will need a +50% increase to get that portion of your money back up. After -50%. you need a doubling. After -75%? You need 4x to get back to even. Forget about it. You really can't get into a habit of entertaining huge losers remaining in your portfolio.

I'm not saying that a hard stop at 10 percent is always the right one. It may depend on the wider environment and stage of the credit cycle and macro goings-on. If you know the sell-off is very likely to be temporary and not an indictment of your chosen companies, you can ride it out.

But you absolutely have to control the drawdowns in your losers somehow.

Choosing lower risk entry points with a higher probability of going up than down, is also a big part of successful investing. Learning the fundamentals of technical analysis is essential.

Honestly yes you can take large losses and be profitable. That’s something they lie to you about in the trading books. Many strategies do just fine with it.

But I think this conversation was more about investing than trading. The market often does do mini crashes (sometimes big %) then end up fully mean reverting and then going up. Someone investing their savings and not trading would be very poorly served with stop losses. We’ve had many crashes that then V-shape back up. The correct thing for them to do to manage risks is diversifying, maybe risks-parity, and keeping beta down to their risks tolerance.

Stoplosses exist.

That's the second step. The first step, when somebody is "financially illiterate beyond penny saved > penny earned", is to point out that the risk exists. Once that's done, you move on to how to deal with that risk.

You should not divide those steps into separate sessions because the first one will needlessly scare people away.

Is there a point in not investing that sum?

Commissions (trade fees) are pretty small these days. Pick a cheap online broker if you want to pick stocks yourself, or a cheap passive index fund (the annual fee can be absolutely tiny, like 0,1%).

Putting less than 500 in an individual stock becomes a bit silly, but with 5000 you can diversify somewhat (a handful of stocks) and still have it be worthwhile.

Can you recommend a good guide on how to get started with zero prior knowledge of investing?

Is there a point in not investing that sum?

Having it available in case some major household appliance breaks, or the car, or we need to organize a move.

Since I know that you are german, I'd recommend to get a scalable capital account ASAP and put the 5000€ into the Tagesgeld there to start with. It gives 2.5% with no volatility, no fees, minimal risk and full access to take it out any time. That helps serve as a good basic protection against inflation. There's probably similar options with Trade Republic and the like, but I'm not familiar with those.

From there, you can start trying out any of the other investment schemes others recommend here. From my side, I'd just invest a percentage you're comfortable with into a world ETF through a fee-less monthly plan.

https://www.bogleheads.org/wiki/Getting_started_for_non-US_investors

I looked up a newbie guide and skimmed through it for you. I've watched a few of this guy's videos before. He knows his stuff and seems honest.

https://youtube.com/watch?v=bqPSFw1eiNc

Watch the first hour. The rest is US specific tax stuff.

If you are going to become any good at this stuff though, there is no single guide that can be followed. Just like there is no single guide to becoming a doctor or any other profession. There is a lot to learn, and many sub-sections. If you are going to be an active investor with a good chance of success, you will need to read a bunch of books thoroughly and study for at least a few hours per week over a few years.

Having it available in case some major household appliance breaks, or the car, or we need to organize a move.

The emergency fund should generally not be invested. Definitely set alerts and/or stop losses if you do invest it. General advice: Investing without a pre-defined risk and a stoploss is like driving without any brakes. Investing 5000 does not mean you are actually risking the 5000. With a stoploss of 10%, and a catastrophic market crash of -10% in a single day, you will be getting out (if you have any sense) with a loss of 500. That, those -10 percent, is your risk. Always pre-define your risk and cut your losses short instead of freezing up with indecision.

I feel like playing with stoplosses and other advanced tools requires a lot of understanding, otherwise you'll implement the "buy high, sell low" strategy. For a person that doesn't know much about how it works, probably wide index hold would work better long term. If you get nervous and sell while down, and then when it goes up you're unsure it's really up until it's clearly very much up and then you get FOMO and buy - then you get sub-market returns.

General advice: Investing without a pre-defined risk and a stoploss is like driving without any brakes. Investing 5000 does not mean you are actually risking the 5000. With a stoploss of 10%, and a catastrophic market crash of -10% in a single day, you will be getting out (if you have any sense) with a loss of 500. That, those -10 percent, is your risk. Always pre-define your risk and cut your losses short

That's not at all general advice, that's typically considered a rather bad idea. Unless you're betting on single stocks you're not even that confident in, the market is going to recover from any fluctuations and you want to ride it all the way back up after any drops. General advice is to buy basic index funds and try to minimize how often you even look at them, trusting in the long run returns.

Having it available in case some major household appliance breaks, or the car, or we need to organize a move.

Do you have an emergency fund already set aside?

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