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This is the latest installment of our “Ask Wealthsimple" series, where our chief financial genius Brian Byrnes helps you navigate the world of investing.
Is there a foolproof way to determine whether a person should invest?
There’s a very simple thing called the one-page financial plan that will help determine whether you’re ready. First, write down how much debt you have. If you have debt, especially high-interest debt, pay it off before you do anything else. Second, write down how much of an emergency fund you have. You need three to six months’ worth of expenses tucked away in a solid savings account for a rainy day. These are the first steps to taking care of yourself financially. At this point, you're ready to start thinking about investing.
Well, there’s debt, and there’s ugly, awful debt. If I’m carrying low-interest student-loan debt, does that mean I shouldn’t invest until I pay it off?
I always advise people who have debt to pay it off. High-interest debt is a no-brainer—pay off anything over about 5% before doing anything else. If you have debt with a lower interest rate than that, and you have tolerance for some fluctuation (i.e., money you invest doesn’t always go up in value), it might make sense to invest while you're paying down the debt. And I always advise a bias toward getting started over not. Getting started is what’s important. So even if you’re just opening an account with £100, whatever it happens to be, it makes a huge difference down the road. And when you start early you begin to actually understand how the markets work and what fluctuations feel like, so you'll have a head start when you're ready to put more money to work.
On the Wealthsimple website, I saw something illustrating the hypothetical growth of £20,000. A lot of us just don’t have that kind of cash lying around. How much do I need to start meaningfully investing with you?
Well, there are no minimums to start an account with Wealthsimple. To have a perfectly diversified portfolio of passive funds we would suggest starting with £100. Because we believe all portfolios are created equal, no matter the size, it's possible to invest well with us no matter how much money you have.
OK, but I can’t fight the feeling that investing isn’t all its cracked up to be. I mean, I lived through the financial crisis. Michael Burry, the hedge-fund manager Christian Bale played in
I think the simple answer to that is no, you're not crazy. Markets aren't static. They move up and down on a monthly, yearly basis. Change is going to happen, and frankly it's out of our control. The key is to look at markets over time. In the long term they tend to move up. What’s important is to focus on the things that we can actually control; investing at regular intervals, diversifying your portfolio, making sure your investment horizon is long enough, and keeping your fees low. No crisis, either long or short, is fun, but keeping a long-term view will help you overcome it.
But Burry has also said that he’s investing heavily in water, which scares me to death. I wonder if not only will markets not inevitably rise but also perhaps we’re facing some future that looks like a post apocalyptic movie.
Sure, our future could look scary, at least temporarily. But if we end up in a post apocalyptic world I think we're going to have far bigger problems to deal with than pensions. In the last hundred years, we've had world wars, terrorism, depressions, all of these things ebb and flow, and we end up as a global economy stronger on the other side. Shocks create opportunity in the stock markets. People should embrace it as an opportunity as opposed to being scared of market jitters.
How does fear create economic opportunity?
People who are nervous about Brexit or some post apocalyptic scenario are liable to sell based on emotion and fear. The opportunity is for people who are willing to stick with their plan regardless of market fluctuations.
Isn’t there any argument to be made for sitting on cash, stuffing it in your mattress until the economy looks calmer and a little more hospitable for investing?
No. At that point, you're guaranteed to lose money against inflation. With inflation running at even 2% or 3%, you'll consistently end up losing money. Look, there’s never been a moment when it’s felt like the perfect time to get into the market. But the times when it feels like it might be the worst time to get in often turn out to be the best times to invest in hindsight. The kind of passive approach we take is about tuning out the day-to-day noise. It’s rooted in the notion that as a society we inevitably go through periods of pain, but we also inevitably come out the other side. And so whether it's Brexit or UK housing prices, these events come with market corrections. But they're normal and it's healthy, and these setbacks kind of recalibrate the market to be stronger in the future.
All investing should be considered long-term. While stock markets have typically trended upwards over the long term, your investments can go up and down, and you may get back less than you invest.
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