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First of all congrats on saving 10k this is a nice sum and something to be proud of. I wrote this article not to give you financial advice, but to help you have a productive conversation with your financial advisor.
10k is a nice sum, you need to understand the context sum for you to make better investment decisions. Here are some questions to get you started: How hard you have worked and how long it took you to save this much? How precious are these 10k for you? The investor who has can save 10k in six months can invest differently than investors who can save 10k in six years. How stable is that income? Who depends on that income? Any upcoming bills you have? Do you have an emergency fund? If you do not, you probably should, at least six months of expenses in cash. You do not need to save all that at once, you can start with an emergency fund for a week and move further from there.
How to choose an investment
Things to look for when choosing an investment. (Not an exhaustive list)
- Is this investment regulated or not. If it is not regulated, walk away.
- What are the costs, such as the investment fees, holding fees, and exit fees to buy, own and sell this investment? Consider a 1% fee will cost you 10% in 10 years, 3% is 30% of your capital in 10 years!
- How much time would you like to spend to manage this investment? Some investments are 95% hands-off, others need more time.
- How volatile is this investment, would you be able to sleep at night if your investment went down by 50% in a week?
- What are the potential returns? Is there a benchmark of their performance in the past. Past performance is no guarantee of future performance.
- How easy will it be to compound the investment’s returns and what is the potential impact of compounding the losses?
- What is your financial education level, do you understand some investments better than others? Shy away from anything you do not have a good grasp of.
Ways you could invest 10k
1. Short term deposits in a Bank
- Fees and Costs: Some deposits now have a negative interest rate, banks usually charge a fee for having an account.
- Active vs passive: Passive, no need to manage except at the start and end.
- Risk: Most countries guarantee their bank account deposits up to a certain amount. There is little risk in holding cash, except that of the purchasing power being eroded through inflation. The other risk is spending it!
- Store of Value: Central banks have a mandate to maintain price stability, in the short term cash is the most stable store of value. This may not be true for the long term.
- Potential Returns: Very low
- Compounding: Easy to compound by reinvesting capital and interest in another certificate of deposit at the end of the term.
- Fees and Costs: Buying bonds directly from governments has no fees. Buying a Bond ETF or a mutual fund has.
- Active vs passive: Passive if you plan to hold this for a certain period of time, without taking into consideration what is happening in the world. You only need to fill the paperwork at the start and end of the investment.
- Risk: Not all bonds have the same risks! Government Bonds (from financially strong governments) have the lowest risk, Junk bonds in their many forms have the highest.
- Store of Value: Short term Government bonds are a stable store of value. Long term though, it all depends on inflation. With an inflation rate of 3% a year in 10 years you will lose 30% purchasing power.
- Potential Returns: Interest rates in the modern west are low today and some even have negative yields. Bonds have a cap on their returns as the underlying capital never increases in value. The yield only comes from the interest.
- Compounding: It is quite likely to invest in the same asset class again but there is no guarantee you will be able to do so with the same exact conditions. If you invest through a Bond ETF, the investment manager will reinvest all interest again automatically.
3. Index funds
- Fees and Costs: Beware of the totality of all the fees. The more exotic the index funds the higher the fees. Vanguard has the reputation of being the cheapest.
- Active vs passive: If you plan to just hold, it is a very passive investment.
- Risk: Stocks tend to go up and down with the profitability of the companies they are invested in. Those companies depend on a combination of economic growth, profit and competitiveness. Usually the more exotic the funds the higher the risks. Investing in an AI fund is a higher risk than investing in a global index fund. An AI fund, probably also has higher fees.
- Store of Value: Maybe in the very long term.
- Potential Returns: On a long time scale (sometimes very long) the returns can higher than cash.
- Compounding: Some of these ETFs give out a dividend, and to reinvest you would need to buy more shares in the index fund. Some do this automatically upon request.
4. Peer to peer lending
- Fees and Costs: Investors usually do not pay any fees when investing in p2p lending.
- Active vs passive: Active, You need to keep a watch on what is happening in the p2p space and with the platform you invest in. There might be risks developing to which you would need to react rather quickly.
- Risk: The risk classes in the p2p space diverge a lot, usually the higher the interest rate the higher the risk.
- Store of Value: No. When you invest in a p2p company you have an IOU note to the lender or the p2p company.
- Potential Returns: 10% or more, but this comes with strings attached see above.
- Compounding: For companies with an auto-invest feature this is very simple to setup, any interest is reinvested into loan types of your choice. In some cases, where there is no auto-invest feature, you will need to login and reinvest manually to compound your returns.
5. Real estate crowdfunding
- Fees and Costs: Usually none.
- Active vs passive: Best to monitor the performance of the platform, reviews and investments are done.
- Risk: Depends on the true value of the property used to secure the loans and the property market.
- Store of Value: There are two types of real estate crowdfunding, equity and loans. Loans are not a very good store of value historically. Owning land directly is a much safer option, because and will always have value and in some cases, this value is more stable than currency.
- Potential Returns: The p2p property market is very diverse both in geography, investment type and guarantee type. For loans, it all depends how genuine is the LTV in the present and how valid will it remain for the future. For equity, owning property directly, it depends on being able to sell the property.
- Compounding: If the p2p platform has an auto-invest feature it is easy, if not you need to log in each time to reinvest.
6. Individual stocks
- Fees and Costs: There are fees to buy and sell the stock. There usually are no costs to hold the individual stock.
- Active vs passive: This is an active investment from start to finish. Research and learning how to find the best individual stocks need time and deep thought. Setting an exit strategy, before buying is key.
- Risk: It is very difficult to achieve wide diversification from investing in individual stocks when you invest in individual stocks, you are tying your financial future with a few companies.
- Store of Value: The value of stocks does not necessarily mirror their actual value, there are volatile and thus a weak store of value.
- Compounding: Some stocks issue either cash dividends or more stock. If you choose more stock you do not need to do anything reinvesting happens automatically.
- Fees and Costs: You can buy physical gold you physically hold, physical gold which you entrust to third parties or a gold etf. All three have different costs. When someone else is holding gold for you will have to pay them custody charges.
- Active vs passive: Gold is passive once you buy it you only need to make sure it is safe.
- Risk: Golden can be stolen, Central banks hold a lot of gold, and they seem to be buying more of it.
- Store of Value: Historically gold has been a good store of value.
- Compounding: Gold does not compound.
Potential ways to buy Gold:
If you only have 10k to invest then probably investing in crypto should be done with extreme caution. This investment class is unregulated, volatile and full of hopium projects.
- Fees and Costs: Buying and Selling crypto incurs a fee. Holding cryptocurrency does not have a fee unless you hold it with a custodian.
- Active vs passive: As you wish.
- Risk: Insanely high.
- Store of Value: Bitcoin may be digital gold, Dash may be digital Cash. Many altcoin cryptocurrencies have high rates of inflation.
- Potential Returns: Historically very high, unregulated investments have higher risks
- Compounding: Companies like BlockFi generate interest on your holdings.
9. Alternative investments
Alternative investments include direct investments in agricultural projects, stamps, whisky, s and the like. Securities on the US stock market are strongly regulated, these public companies need to file detailed audit records of their business, alternative investments usually have no necessity to audit or publish their accounts.
- Fees and Costs: Usually very high.
- Active vs passive: Active
- Risk: Very high, as these tend to be unregulated, which attracts a certain class of investment providers
- Store of Value: Doubtful
- Compounding: Possible
Allocation is the process where you determine what percentage of the 10k each investment gets. The older you are the higher the percentage of that money should go into safer assets. The less risk-averse you are the less risky your investment should be.
Investing your first 10k is both your first step to building your financial independence and of your financial education. Engage with the services of a professional money advisor and challenge them on how they earn their commissions.
See also: Passive Income Investments