What is Investing?
I wanted to start off the blog with something that is trending and quite exciting right now, with major asset classes booming at all time highs, I feel like this would be a great place to begin our journey.
To be honest, even though it is not where I started, I wish it had been, because if I had started investing earlier, I would be a lot wealthier. Of course, with the power of hindsight, we would all change something, so it is best not to dwell on it. That is why I want to start with teaching you a little bit about investing, what it is and just why I wish I had started investing when I was 13 years old!
First of all, the definition of investing is “the act of allocating resources, usually money, with the expectation of generating an income or profit.”- [1]
I like the definition taken from Investopedia, which is a great tool to use if you really want to learn about investing in a lot more detail than what we will be covering in the article today. Now, what does that mean?
Well first of all it is probably best to understand a little bit about Money and also a little bit about the different assets in which you can allocate your money to and why we should do this.
Over the years, I have come up with my own definition of money, which we use as a tool to find a middle-ground between buyers and sellers.
Money is the subjective tool we use to find value in the products and services we wish to attain or buy. It is nothing more than a concept we created to make buying and selling easier, a middle-ground that everyone can accept.
Much like salt, sugar and gold, we used these as mediums of exchange to barter and trade in the past, however it meant that for those that had more knowledge, they could rip more people off. Not to say this doesn’t still happen, but we have a much better system that creates a fair market and opportunity for all.
Thanks to the improvement of this money system, we live in a much more sophisticated and intricate world of economics and globalism, where supply and demand, as well as the overall market, is what sets the prices. I will not bore you with the details here, but just understand, that you as a buyer and seller in the market is needed for prices to be set.
Which is correct for all markets, from food, to real-estate to bonds and shares. Now that you understand, money is nothing more than a tool to make buying and selling easier from person to person, we can delve into the world of investing.
Based on the definition of investing, you need to be able to park your money somewhere, in the hope that the money you invest will make you more money and that newly earned money will also make you more money. (Therefore, $1 becomes $2, that $2 becomes $4 etc.)
That is the beauty of what Albert Einstein called “the 8th Wonder of the World,” yes I am talking about compound interest/earnings.
I won’t get into the details of compounding today, however, compounding is the main reason I would have started investing earlier if I could have.
Now, all this talk of investing is great, but where do you invest your money?
Well, there are plenty of different assets classes to choose from, but today, I will go through the five main asset classes.
Firstly, what is an asset?
“An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.” [2]
Again, I like the definition from Investopedia, which explains an asset perfectly, it is essentially a resource, like an investment property, a painting, an NFT (non-fungible token), shares in a company/business, etc. That you hold/own in the hope of future economic benefit.
So what are these five main asset classes I was talking about?
Shares/equities
Bonds/coupons
Commodities
Cash
Real-estate
Of course, you could put Crypto in there, but I guess that would fall under commodities, as crypto is very similar to gold, however it could also fall under cash, but we won’t go through that today.
These five different asset classes have been proven to, over the last three hundred years, to make returns consistently. Of course, the asset classes have markets of their own, and these markets go up or down (cycles), but for the majority of the time, they have increased over time.
We can prove this through what we call the S+P/ASX 200, which use to be the Australian All ordinaries index from 1980, before it was replaced with the ASX 200 in 2000. Essentially, the ASX 200 is what we all an index, which is just a group of the top 200 companies in Australia when it comes to their Market capitalisation. Don’t worry too much if you don’t know what this means, just remember that the ASX 200 is a group of the biggest 200 companies in Australia.
Now, if we look all the way back to the year 1938 and the ASX 200 was roughly around 50 basis points, which means you could own 1 unit of the ASX 200 for $50 in 1938. [3]
Now, fast forward to today and the ASX 200 is currently, at the time of writing this article, 7272.7 (bps).
That means $1000 invested in the ASX 200 (Share market) in 1938 would be worth $144,454 today, which does not include dividends paid from investing in the index either.
That sounds pretty sweet, doesn’t it, invest $1000 and make an extra $144,454 on top of your $1,000. That is what investing is about, it is looking to sacrifice in the now, for the hope of future financial returns.
I don’t believe I will have to explain the reason as to why we should be investing, the numbers speak for themselves, but I just wanted you to understand a little bit about investing and the history of it, as I have found this quite helpful in my own investing journey.
I will be going through how to invest, and also what the reason will be to invest in a future article, so please make sure that you subscribe to the blog and our newsletter by clicking the subscribe button.
If you do have any investing questions, or are looking to start your investing journey, I would love to know what your questions are or how you are starting through the comments below;
But until next time,
Take Back Control.
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References:
[1]- Investopedia- viewed 12/10/21- https://www.investopedia.com/terms/i/investing.asp
[2] Investopedia- viewed 12/10/21- https://www.investopedia.com/terms/a/asset.asp
[3] Market History - viewed 12/10/21 - https://www.marketindex.com.au/history
