Unshakeable Flashcards
The basics; What is a share/stock?
It is a small part of a company that anyone can buy or sell. For example, if you wanted to then you could buy a small fraction of Disney by buying one of their stocks. Then if Disney grows more successful in the future, then your stock also becomes worth more money. This means you become wealthier because you can sell it for more money.
Why invest in indexfunds?
- Choose Index Funds: They provide reliable long-term growth with low fees
An index fund is like a collection of ALL the stocks on the market. When you put money into an index fund, you’re not just picking one stock—you’re picking them all! That’s right, you’re putting an equal bit of money into EVERY bigger stock on the market.
For example, have you heard of the S&P 500? This is a list of the 500 biggest US companies including Amazon, Apple, Google, Walmart, McDonald’s, etc. Well, there are S&P index funds available that let you invest equally into all 500 of these company stocks at the same time.
Index funds are great because they make investing far more safe and predictable. Although individual stocks have always been risky and individual companies can always go out of business, the stock market as a whole has always gone up over the long term. This means if you invest in every company on the market, then you are almost guaranteed that your money will grow over time. (Yes there have also been many shorter-term market crashes and corrections, but we’ll talk about these in a few minutes.)
What is compounding wealfh?
The key is to see investing as a very long-term game. Put your money in for 10, 20, 30 years or longer. If there’s a recession, then you will appear to lose money for a few years. But if you stay calm, keep your money invested, then it WILL eventually recover and your wealth will grow by about 10% per year. The reason investing can pay off so much in the long term is because of something called compound interest.
Compound interest is when this growth continues the following years and multiplies itself. This means your past interest starts to generate its own interest.
To illustrate this, let’s go back to our last example. So you had $100, then over one year you made 10% interest and now you have $110. So what happens the second year? Well, if you made 10% interest again, then you would earn another $10 from your initial amount and another $1 from the $10 you earned the previous year. This extra dollar is the compound interest.
Don’t put money in mutual fonds, why?
Mutual funds are also a collection of stocks, but a fund manager picks which individual stocks go into it. Now, in a perfect world, having a professional pick stocks for us sounds like a great idea. However, research shows that mutual funds simply don’t perform as advertised. They usually grow our money slower than index funds, especially when the higher fees are taken into account.
Be careful about transaction fees!
Mutual funds have fees of 2% or more. It doesn’t sound like much, but can cost you hundreds of thousands of dollars in potential retirement savings over a lifetime. Index funds usually have fees under 0.5% because they are mostly automated.
How to invest during a crisis?
A market correction is when stocks fall by 10%. They have happened once a year on average since 1900. A bear market is when stocks fall by 20% or more. These happen every 3-5 years on average. These market falls are normal and predictable so remain calm and stay invested.
A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread.
What is diversification?
Diversification is spreading your money over many types of investments, like different countries, different stock markets, bonds, real estate, etc. With this strategy, your wealth can keep growing even when one part of the economy stops.
How can you apply the most important principles of this book to your own life?
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