#1 The Beginner Retailer Investor Guide - Where to Start?

I started investing during 2022. I remember the toughest and most challenging thing was to figure out where and how to start investing my savings to gain a return on them and protect them against inflation. To help people on the first steps of their investing journey, I am starting this series of newsletters explaining how to start and sharing some of my experiences (and mistakes).

In today´s newsletter I will cover the first step I made: figuring out what needs do I have, how can I use investing to fulfill them and which is the investing style which will help me the most to reach my objective.

Which needs do I have?

As an engineer in his twenties I am concerned with the retirement pay I will get once I retire in 40 years time. In my home country - Spain - the public pension system its a distribution scheme where current retirees pay comes from taxes and contributions to the current workers on the system. In exchange, they get the right to receive a fair retirement pay when they retire. Hence, I have 40 years to boost my savings to the extent possible for when retirement time comes.

In conclusion, I need to ensure I will be able to keep a lifestyle I will be happy with when I will not have my current primary income source. Pension payment its not sure so I need a plan B. This is my need and it establishes my time horizon as an investor, which is a key element when choosing an investing strategy.

How can investing help me fulfill them?

As an individual I decided to start investing to prevent my savings from being cannibalized by the ramping inflation of 2022. Inflation will destroy in the long term the unused savings from my bank account. In 40 years with an average 2 % inflation rate, my savings will be worth less than half of what they are currently worth.

One option I could have to boost my savings would be to find a second job or activity I get paid for. Another option would be to start my own company instead of working for another company in exchange of a salary. However, these two options are active alternatives to boost my savings: they are time and energy consuming.

Therefore, I needed to increase my savings passively, while I work on my regular 9 to 5 job. There are multiple financial instruments with different returns and risk levels. Only the ones which have the potential to provide returns larger than inflation during large periods of time were potential candidates for me.

At this point we have established that additional income has to be passively generated and which is my investing return benchmark, inflation.

Which investment strategy/style fits me best?

As I mentioned before there are several financial instruments to generate passive income from savings. They most commonly used by people are:

1. Fix-income securities → debt instruments that pay a fixed rate of interest. Some types are bank deposits, bonds, notes, etc. They seem to be the safest instruments with a return which does not always cover the inflation rate as they are specially impacted by macroeconomics.

2. Variable-income securities → ETFs, stocks, options, etc.

3. Real estate → for individual investors I think it is not the best option based on:

   • It is time consuming and the landlord has a series of obligations to fulfill with the tenant.

   • It provides comparable returns to the market

   • It requires an initial huge investment

   • Risk due to lack of diversification - the only real estate property you have might get flooded, the neighborhood might deteriorate and rents decline and many other potential risks that could be listed.

4. Other assets → gold, collectibles, luxury items, etc. It requires a larger share of your time plus specialized knowledge on the niche(s) you operate.

Considering pros and cons, only investing on variable-income seemed to match my objective of preserving and progressively increasing my savings’ real value with time. Moreover, for long hold periods variable-income securities have been proven to be the least risky investments. See figure 2.

The Must-Read

For beginners, to get a deeper knowledge on all the investment instruments, macroeconomic impact and an introduction to many more advanced topics and theories the must-read book covering these discussions is Stocks For The Long Run The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies of Jeremy J. Siegel.

This is the end of the 1st newsletter on the new series The Beginner Retailer Investor Guide. Hope you enjoyed it.

Stay tuned at @SiemprePulpo