Myth busting Mini-Series Part 3: “You have to be good at mathematics to invest”

Victoria Mindset, The 5 Finance Sisters Steps Leave a Comment

You do not need to be a pro mathematician to invest in the stock market!

Have you heard of the research where scientists let monkeys choose stocks? Here are some headlines we found in a web search: 

We hope you find these headlines as funny as we do! We put them here to get you to think differently about the stock market. Luckily, there are some proven ways that you can beat those monkeys, slowly but surely. 

To recap the main points:

  • As a beginner investor, avoid buying individual stocks and focus on broad based index funds. 
  • While you do need to do your research, you do not need to make complicated financial calculations to start investing
  • You're already great at making calculations that matter

Actions for you to consider next:

  • Educate yourself about index investing and ETFs. We have made a start on our post about What to consider when choosing an ETF
  • Set goals about how much you can invest and where this will take you
  • Play around with an online calculator such as a "retirement calculator"

What we're about to tell you may sound like it is too good to be true

In our Pledge to you, we promised to be honest with you, and that we would not sugar-coat our content to make you feel better. So please believe us when we say that investing in the stock market can be surprisingly simple, and you do not need to be an industry pro or even a university graduate to be successful, as long as you follow some basic principles. 

1. Be a passive investor

Many sisters out there believe that investing means buying shares in companies. We get asked "Is now a good time to buy airline shares?", or "What do you think of company X, should I buy their shares?". This was also our initial approach to investing in the stock market. We bought a book on the calculations you need to make to evaluate whether Company X is a good company to invest in. And we listened to people we trusted who told us to buy shares in Company X. Well we all make mistakes...

If only we had known about a much, much easier strategy, that has historically achieved a MUCH, MUCH better result than anything you can achieve by trading individual stocks and actively managing a portfolio. Our strategy is: passive investing in a broad based index fund (see our article about Exchange Traded Funds (ETFs).

Sure, some people are way more successful by buying individual shares and trading regularly than the strategy that we propose, but there are as many people who are also very unsuccessful. And of course we cannot predict the future, but based on historical data, passive ETF investing in a broad index fund has returned 7% per year on your money. 

While researching this blog post we came across an interesting statistic: If Trump had liquidated his real estate holdings in 1987 and put them into a passive ETF that tracks the S&P 500 index (the top 500 US companies), he would be worth 3 times more than he is worth now... that's pretty shocking given that his campaign is based on his success as a businessman. 

Broad-based or traditional index funds are a great starting point for beginners, as they have low fees, and you can buy them through any trading platform, and you do not need to spend hours researching a particular company. You just buy a little bit of the entire market (this is what broad ETFs do that track a global index like the MSCI World index).

By having a simple index investment strategy, you can focus on enjoying other parts of your life, while you have the peace of mind that your investment approach, at least based on data from the last 100 years, will be more successful than most fund managers have been able to achieve. 

2. Invest and forget

Another thing that is hard to believe is that we don't check out investments often. Perhaps once a quarter when we figure out our Net Worth. This is a common piece of advice in the investment world, and one that suits us quite well. Dare we say that women are better than men at investing and then forgetting about it? Anecdotal evidence suggests this is the case. We rather spend our time doing other things than checking what the stock market is up to. Thumbs up sisters! 

3. Let out your inner Household CFO

Please tell us if you think we are being too cliched here, but as many women are also the Household CFOs, we think that you ladies are better at maths than you think you are. Who figures out that by buying better quality clothes you can save money in the long term and be better to the environment? Who takes their shoes off after a night of partying when walking home (to preserve the heels for longer of course)? Who buys a family pack of pasta (or chocolate) because it makes economical sense? We also bought 40 rolls of toilet paper before quarantine and it lasted us for 4 months!

You are good at making life choices and this is what you need to achieve financial independence. 

Note: you do need to do your research as well though - just like you research other things to the n-th degree when you're passionate about it. 

4. There are many tools to help you on your financial journey

The tools you can find online (or also by buying our book) can provide you with all you need to get started, with simple explanations to help you understand them and to help you customise them for your situation. Try typing "retirement calculator" or "net worth calculator" into your search engine to find lots of tools for your location and situation. 

5. Enjoy

Please believe us that as soon as you have made a start, you will find the motivation to continue to learn about investing and what it means for your personal goals. 

Financial terms alert.... we use some terms here that you may not be familiar with. Please look them up on places like Investopedia if you don't understand them. As we are just starting out with the blog we cannot cover them here now but we will strive to do so in the future. 

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