Investing Basics

Investing Basics

The Power of Compound Interest


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For my building friend Darren who buy a cup of coffee and sanwiches every day on the way to work.
If he spends £3 per day having a coffee on the way to work.  That's 45 weeks x 5 x 3,  a whopping £675 pa

If you invested this sum of money at in the stock market over 20 years it would be worth between £18,000 and £28,000 assuming modest returns of 3% to 7% pa.

All for the price of a cup of coffee. Take a packed lunch instead of another £4 for sandwiches plus a drink and calculate what he could save.

Finding Out about Investing

Before you start to make investments you should understand some of basic terminology.  For simplicity let us define a Market as all the Companies that you could possibly make investments.  This could be the whole world, a geographic region, a country or even a sector based on what a Company makes or services they provide.

The goal of investment is to make a return which could either be through growth or income paid through dividends or a combination of the two.  The aggregated return of all the companies in the market will be the market return which is usually defined as 'Beta'.  A market may also have an index that represents a normalised aggregated value of all the companies within the market.  One such index is the FTSE 100 representing the top 100 companies in the UK by size. The change in the index is a representation of the change in the value of the companies covered by the index.

It costs money to invest, i.e. buying and or selling individual stocks
Investing in a cheap index tracking fund is one way of attempting

For instance, if the UK’s FTSE 100 index of the top 100 largest companies goes up 10% this year and pays out 4% in dividends, then the total market return would be 14% for the year.

You can get the vast majority of this return by owning a cheap passive index fund that tracks the index (with a little bit deducted for the costs of running the fund).

Hear the Great Warren Buffet explain why you should invest in Passive Index funds as his performance figures illustrate. Recording is an extract from the Berkshire Hathaway Shareholders meeting in 2016.

In 2008 Warren Buffet made a bet that the Vanguard S&P 500 would out perform Hedge fund managers over a 10 year period. A 2 and 20 Hedge Fund charge means the Manager takes 2% charge of Investment value and 20% share of the profits they make.

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