Skip to content

How to Invest for Beginners

2020-10-11 (said on 2020-10-08 — implied: date said in the video; uploaded 3 days later) · Long video (solo, talking head or whiteboard) · Ali · recording, 29:08 · watch on YouTube

Topic: Money and investing · mode: Explanation and tutorial · tags: His own numbers, Aimed at students

Ali walks beginners through investing in twelve steps: inflation erodes cash, index funds such as the S&P 500 beat picking individual shares, the stock market is risky only in the short term, and you should start as early as possible once high-interest debt is paid, an emergency fund is set aside and no big expense is near, through a low-fee online broker (in the UK a Lifetime ISA, a stocks and shares ISA and Vanguard).

What is said

The parts of the video and what is said in each (★ — how much it matters to the video).

00:00:00 — Why investing seems a complicated black box, and the plan of the guide

00:00:56 — What happens to money over time: inflation, savings accounts and compounding

  • ★★ Inflation is generally around 2 to 2.5%, so every year things cost about 2% more than the year before, Ali explains. — 00:00:57
  • ★ As an example of inflation, a cup of coffee in America cost 25 cents in 1970 and $1.59 in 2019. — 00:00:57 · United States
  • ★★★ Money kept under the mattress loses value, and so does money in a savings account paying about 0.2% interest while inflation runs at about 2%, Ali says. — 00:01:26
  • ★★ To show compounding, Ali imagines a savings account paying 10% a year: £100 would grow to £259 in ten years, still worth £206 after inflation. (hypothetical) — 00:02:54
  • ★★ Most savings accounts in the UK, and he imagines elsewhere too, offer less than 1% a year, so savers still lose money to inflation. — 00:03:23 · United Kingdom

00:03:52 — What an investment is: a rented house, shares, dividends and capital gains

  • ★★ Ali defines an investment as something that puts money in your pocket, such as a house rented out for income that also rises in value. — 00:03:52

    “an investment is something that puts money in your pocket”

  • ★ Some people have said that UK house prices have historically doubled every ten years. — 00:04:21 · United Kingdom

  • ★★ Buying a house as an investment is a bit annoying, Ali says: it needs a large deposit, a mortgage and managing the rental. — 00:04:51
  • ★★★ Basically 100% of Ali's investment portfolio is in shares, with a tiny percentage in Bitcoin; he owns his house but does not count it as an investment. — 00:05:20
  • ★★ Buying a share means buying part ownership of a company; shareholders make money from dividends and from capital gains as the share price rises. — 00:05:20
  • ★★ Ten Apple shares bought in 2010 at $9 each, $90 in all, would be worth $1,150 in October 2020 at $115 a share. — 00:06:47 · Apple

00:07:09 — How to buy a share through a broker, and why not to pick individual shares

  • ★★ Shares are bought through a broker; today that means making an account with an online broker, and each country has its own brokers because of its laws. — 00:07:17
  • ★★ Most UK banks also offer an investment account, but their interfaces are usually clunky and old-fashioned, so you are usually better off with an online broker. — 00:07:46 · United Kingdom
  • ★★ In the UK Ali uses two online brokers, Charles Stanley Direct and Vanguard. — 00:07:46 · United Kingdom
  • ★★★ Ali advises beginners not to try to work out which shares to buy: you do not want to buy individual shares. — 00:08:15
  • ★★ Investing in individual stocks is risky, Ali says: a company like Apple will probably be around in ten years, but many companies once hailed as the thing to invest in went bust. — 00:08:39 · Apple
  • ★★ Expecting Amazon to grow tenfold again because it did in the last ten years is trying to predict the future; past performance is no real indication of future performance. — 00:09:02 · Amazon

  • ★★★ The advice most people give beginners, which Ali passes on, is to invest in index funds rather than individual stocks. — 00:09:02

    “you should not invest in individual stocks, you should invest in index funds”

  • ★★ Graham Stephan (quoted): Graham Stephan, one of Ali's favourite YouTubers, says index funds are the best, safest and easiest long-term investment strategy for most people. — 00:09:02

  • ★★ A fund pools the money of many investors, and a fund manager decides which companies it invests in, taking a management fee of one or two percent. — 00:09:31

00:09:34 — What an index fund is and why it is good: easy, diversified, low fees, hard to beat

  • ★★ A stock market index is a list such as the FTSE 100, the 100 biggest companies in the UK, or the S&P 500, the 500 biggest companies in the US. — 00:10:25 · United Kingdom, United States
  • ★★ In the S&P 500, Apple makes up 6.5%, Microsoft 5.5%, Amazon 4.7% and Facebook 2.2%. — 00:10:54 · Apple, Amazon, Facebook
  • ★★ Over its history the S&P 500 has trended upwards, with crashes in 2000, in 2008 and early in 2020 as the coronavirus spread, after which the market recovered almost at once. — 00:11:53 · COVID-19
  • ★★ An index fund combines the two: a fund that automatically invests in all of the companies in an index. — 00:12:22
  • ★★★ Basically all of Ali's investments are in the S&P 500, so about 6.5% of them are in Apple, 5.5% in Microsoft and 4.7% in Amazon. — 00:12:22 · Apple, Amazon
  • ★★ Index funds are very easy to invest in: a beginner does not have to choose companies or read balance sheets. — 00:12:22
  • ★★ Index funds such as the S&P 500 give you a decent amount of diversification, so you do not rely on one sector such as tech or oil. — 00:12:51
  • ★★★ Index funds have very low fees because an algorithm allocates the money; an index fund charging 0.1% is far better over the long term than an actively managed fund charging 1%. — 00:13:20
  • ★★ Historically very few funds have managed to beat the market consistently, that is, to outperform the index. — 00:13:54
  • ★★ Warren Buffett (quoted): Warren Buffett famously says that if given £100,000 to invest now, he would just put it in an index fund like the S&P 500. — 00:13:54
  • ★★ In 2008 Warren Buffett made a ten-year bet, accepted by Protégé Partners LLC, that an index fund would outperform an actively managed fund; he won and gave a lot of money to charity, as Ali recalls it. (hedged) — 00:14:23
  • ★★★ No one can predict what the market will do, so rather than claiming an insight into which ten stocks will beat it, you might as well hitch a ride with the whole market. — 00:14:23

00:15:12 — Isn't investing risky? Selling low, the 2008 crash and the long term

  • ★★ The only way to lose money on anything is to buy it and then sell it for less than you paid. — 00:15:21
  • ★★ In Ali's example, a beginner buys one Apple share on 18 February 2020 at $79.75, watches it fall and sells on 18 March 2020 for $61.67, losing about 20%. (hypothetical) — 00:15:51 · Apple
  • ★★ Had that beginner held the Apple share, it would be trading at $114.96 on 8 October 2020, a good gain within about eight months. — 00:16:49 · Apple
  • ★★★ Stocks and real estate are long-term investments: ideally put no money into shares that you need within the next five years, and many people would say ten. — 00:16:49
  • ★★★ In the long term house prices always go up and the stock market basically always goes up, Ali says, a claim he admits can be controversial. — 00:17:38
  • ★★ In the 2008 financial crash the S&P 500 fell from about 1,500 in 2007 to 735 by February 2009, about 50% of its value wiped out. — 00:18:08
  • ★★ Someone who bought the S&P 500 at 1,500 just before the 2008 crash and held on would now see it at 3,445, more than double. — 00:18:37
  • ★★★ Do not panic-sell when the market crashes: holding on through the 2008 crash would have more than doubled your money. — 00:18:37
  • ★★ If every company in the S&P 500 crashed to zero, the world would be in a mega apocalypse and the value of your portfolio would be the least of your problems. — 00:19:20
  • ★★★ In Ali's opinion, which he says is not financial advice, it is unrealistic to fear losing all your money in shares as long as you are diversified. — 00:19:51
  • ★★★ Investing in the stock market is risky in the short term, but over the long term the market will always go up, provided you do not have to take money out at inopportune times. — 00:20:24

  • ★★★ You should start investing as soon as possible, whatever your age: the earlier, the better, as The Motley Fool also explains. — 00:20:54

    “You should start investing as soon as possible.”

  • ★★★ Before investing, pay off all high-interest debt such as credit card debt, because losses compound just as gains do. — 00:20:54

00:20:55 — When to start: as soon as possible, after three conditions

  • ★★★ Before investing, build an emergency fund of three to six months of living expenses in cash, so that losing your job or a medical emergency does not force you to take money out of investments. — 00:21:38
  • ★★★ Do not put money into stocks that you might need in the next three to five years, such as a house deposit, because no one can time the market. — 00:21:38
  • ★★★ Once those three conditions are met, Ali thinks absolutely everyone should invest something in the stock market, whether aged 12 or 50. — 00:22:37
  • ★★ Because of compounding, starting to invest at 20 rather than at 25 or 30 makes a huge difference to your bottom line. — 00:23:07

00:23:39 — How much money you need: start with whatever you can

  • ★★★ Asked by young viewers with no money how to begin, Ali says to start investing with whatever you can, however small. — 00:23:46
  • ★★ Some investing websites and apps let you start with as little as $5 or £10; others need £100 or £1,000, depending on the site and the country. — 00:23:46
  • ★★ the sooner you start investing, the sooner it becomes a habit. — 00:24:15
  • ★★★ Ali started investing in 2015, knowing nothing about it before, and wishes he had started in 2009 with his first part-time job. — 00:24:15
  • ★★ Had he started investing in 2009 with his first part-time job, Ali says, he would have kept aside maybe 10% or 20% of his income from the top line for his investments. (hedged) — 00:24:15
  • ★★★ Ali is annoyed with himself that from 2012, when his first business began doing very well, until 2015 he invested nothing, because he did not know he could or how. — 00:24:48
  • ★ In 2009 Ali's part-time job paid him about six pounds an hour. (hedged) — 00:25:17
  • ★★★ Even with only a pound or 10p, opening an account and researching the online brokers of your country is the most valuable thing to do right after watching the video. — 00:25:17

00:25:39 — How to begin: choosing an online broker, then setting it and forgetting it

  • ★★ To find an online broker, search for the best online broker in your country and read reviews. — 00:25:46 · Pakistan
  • ★★ In the US most people Ali knows use Vanguard, which Mr. Money Mustache, his favourite blogger, also recommends; a few of his friends use Betterment. — 00:25:46 · United States
  • ★★★ Choose an online broker that lets you invest in index funds, with fees as low as possible, a really small fraction of a percent. — 00:26:15
  • ★★ Ali thinks Charles Stanley Direct charges 0.25%, the lowest fee when he opened his account and still fairly competitive. (hedged) — 00:26:15
  • ★★ Friends Ali has talked to about investing over the last four years have opened accounts, and for the first few weeks they compulsively checked the market on their phones. — 00:26:45
  • ★★ Ali checks his portfolio about once every six months, only out of curiosity. — 00:26:45

00:27:14 — A name for the money series, the UK accounts to open, and resources

  • ★★★ Investing in index funds is a set-it-and-forget-it strategy: the money grows over time as long as you do not take it out when the market dips. — 00:27:14
  • ★★ Ali is still looking for a name for his series of videos about money; on Instagram "Money Talks" was popular but is already a film, he likes "Penny Sillin" (as heard), and many suggested "Finance She Ali". — 00:27:14 · Instagram
  • ★ Ali asks viewers for ideas for the name of his series about money. — 00:27:43
  • ★★★ For UK beginners, Ali's final advice is to open a Lifetime ISA with Hargreaves Lansdown. — 00:27:43 · United Kingdom
  • ★★ As of 2020 a Lifetime ISA takes up to £4,000 a year, which can be invested in the S&P 500, as Ali would do; MoneySavingExpert explains the account. — 00:28:12
  • ★★ Beyond £4,000 a year, put another £16,000 into a stocks and shares ISA with Vanguard; beyond £20,000, open a general investment account with Vanguard, as Ali does. — 00:28:12
  • ★★ For more on investing Ali recommends Graham Stephan's YouTube channel, Andrei Jikh, the Mr. Money Mustache blog and JL Collins's blog with its stock series. — 00:28:42

Threads in this video

Where the stories that moved here went next

Mentioned

Central: index fund · S&P 500 · Vanguard

Also: People: Andrei Jikh · Graham Stephan · JL Collins · Tim Cook · Warren Buffett

Works: Mr. Money Mustache

Organizations: Amazon · Apple · Berkshire Hathaway · Betterment · Charles Stanley Direct · Facebook · Google · Hargreaves Lansdown · Instagram · Microsoft · MoneySavingExpert · Myspace · Netflix · Protégé Partners · Tesla · The Motley Fool

Concepts: capital gains · compounding · COVID-19 · dividend · emergency fund · inflation

Places: Germany · India · Pakistan · United Kingdom · United States

Events: Brexit

Products: Bitcoin · FTSE 100 · Lifetime ISA · Stocks and shares ISA

Only in the description or credits: I Will Teach You To Be Rich · Ramit Sethi

Replies to

← Previous: How I Remember Everything I Read · Next → Revamping My Living Room - Day In The Life