Episode #4 Choosing which markets to invest in

In this last episode of Jeune Investisseur, we review some of the most common ways we can invest our savings. This episode builds on top of what we discussed in episodes 1 to 3, so we encourage you to listen to them if you haven’t yet. We assume here you have laid out your budget & financial strategy (why, how long, how much you are intending to invest), and understand the pernicious aspect of inflation.

Everything personal finance ~ budgeting and interest rates
Inflation and what it means for your investment
Finding the investing strategy that matches your goals
Getting real - tools & methods for Investing tools: you are here!

Let’s get started!

⚠️ The content of our podcast and production is Not Financial Advice. Do your research or contact your financial advisor before making a serious financial decision.

1. The Stock market

In this market, buyers and sellers exchange parts of companies called “shares”. Holding one or more shares of a company usually gives the right to vote at the company’s annual shareholder votes, where decisions guiding the future of the company are made. Shares can also give access to dividends, although this is at the company’s discretion.

What are the pros & cons of investing in the stock market?

Pros

Ease of access: stock market investing is likely one of - if not the - most common way to invest, and vastly democratized over the last few years, with the rise of consumer-facing products.
- Mobile apps like DEGIRO, Revolut, and Robinhood (US) offer low-cost (sometimes free) access to stock market investing. Such apps are designed for today’s ways of accessing information, whereas a decade ago, you would have needed to call a broker over the phone to place trades, at a high cost.
- Ability to buy a fraction of a share. Certain stocks are expensive and not necessarily accessible to retail investors like us. It is now possible to buy a fraction of a share (e.g. 1/4 ), instead of a whole share, which further reduces the entry barrier to investing.
- Finally, and linked to the above point, there is usually no minimum amount required to invest (can start as low as 1 € / £ / $).
Liquidity of the market:
- The stock market is often characterized as a liquid market, i.e. many available buyers and sellers and comparatively low transaction costs (Investopedia). That usually means that trades settle quickly (a few hours/days).
- By contrast, in the real estate market, multiple months will lapse between the moment a buyer & a seller meet and the closure of the trade.

Cons

Time-consuming: If you are yourself choosing which stocks to buy, you might prefer doing some due diligence: looking at the financial results of the company, trends in the broader industry, ongoing news cycles, etc. This will be time-consuming but is important to help you make informed decisions about which stocks to buy.
Volatility: There can be wild swings in day-to-day market returns: positive one day, and negative the next. To handle this volatility (which is linked to the market’s liquidity), and not give in to panic selling, an investor will want to keep their emotions in control.

The $1,000,000 question

Which stocks should I invest in?

Broadly, there are two ways to answer that question:

You can choose a “stock picking” strategy, where you choose the stocks that make up your portfolio yourself. It is therefore important to do your own due diligence as mentioned above;
You can choose a trend and invest by buying units of a fund that tracks this trend. For instance:
- New technology stocks,
- CAC40: the largest 40 companies listed in France by market capitalization & other markers,
- Standard & Poor’s 500: “S&P500” - the 500 largest companies in the U.S.

This is what ETFs - Exchange Traded Funds, also called index funds - allow. An ETF is a basket of stocks that trades on exchanges (e.g. NASDAQ, NYSE) just like company stocks, during market open hours. That means they can be bought & sold just like stocks, and their prices will vary depending on that activity. ETFs can contain all types of investments such as stocks, commodities, or bonds.

ETFs are a good way to easily invest in a large and diverse collection of companies, which can reduce risks.

The tradeoff between these 2 strategies will be time vs return. Generally speaking, stock picking (i.e. the active selection of stocks) will require more time and expertise than investing in index funds. However, it can yield a better return.

2. Bonds

Following stocks, let’s talk about bonds. If shares are a title of ownership in a specific company (you own a small part of the company), bonds are the other side of the same coin: they are a title of debt. Bonds are loans you make to a company or a government, which will reimburse you over a predetermined period. Bonds are traditionally used by companies and governments to finance projects or operations. The bond details will include the principal - i.e. how much you (the creditor) lend to the issuer (the company or government) -, the end date when the principal is to be paid back and the terms for the interest payments. You as the creditor will thus get the principal + interests back.

Pros:

A bond is referred to as a fixed-income instrument since bonds traditionally pay a fixed interest rate (coupon) to creditors. When buying a bond, you will thus have a fixed income for several years, which eases planning.
Relatively low risk. When buying a government bond (e.g. a 10-year US treasury bond), the risk is the probability of this government defaulting, which is unusual. E.g. for US treasury bonds, the risk would be the United States defaulting on its debt, which has never happened, though it was close a few times. If it were to happen, markets would react very negatively. Thus, bonds are considered safer.

Cons:

Lower return. As bonds are usually considered lower risk, they are associated with lower returns. Watch out for high-yield bonds issued by companies at risk of default.

3. Real Estate

Another type of investment to consider when diversifying your portfolio is real estate - i.e. buying a property (house, flat), either to live in (as your main residence), or as a rental investment, therefore renting out the property.

Pros:

You have a solid asset (a home) you can live in. That’s usually helpful :)
Possibility of stable income if renting, possibly cash flow neutral if the tenants pay rent ~ equal to the mortgage payment and cash flow positive once the mortgage is paid off. High potential return compared to financial (e.g. stock, bonds) markets: see here as an example.

Hedge against inflation: generally speaking, the real estate market appreciates over time.
Leveraging effect: While a bank loan (“mortgage”) is usually needed to buy a property, it creates a leverage effect, meaning it enables making a bigger investment over the long term. Contrast this to financial markets, where taking out a loan to invest in stocks is usually not recommended (partly due to the volatility aspect we mentioned above).
Potential tax benefits: Depending on where you live, there exist tax break schemes to help first-time buyers, such as reduced VAT for example. Search for “Support policy for first-time buyers” + your country.

Cons:

Often requires a large initial capital, called a “deposit”: Generally speaking, it’ll be between 5% and 25% of the property value. So if the property you’re looking to buy cost 500,000 $/£/€, you would need to advance anywhere from 25,000 to 125,000 $/£/€. Generally speaking, the bigger the deposit you provide, the better the rate will be on the loan you take to finance the rest (as the loan amount will be smaller, and thus the bank will see it as less risky).
Very time-consuming: Buying a property is a lengthy process that will span multiple months. The initial search, property visits, loan requests, solicitors, possible renovation works… There are numerous steps to get through, and the results (i.e. getting the keys) won’t be immediate. If renting out the property, you will also have to respond to the tenants' demands (e.g. repairs) and find new tenants when needed. Working with a real estate agency is a way to reduce the time investment, in exchange for a fee.
The real estate market is also a localized market, for which it is important to know the area where you are buying, and the overall trends such as population growth, infrastructure investments, urbanization & transport links. All of these will impact the value of your property over the long term.
Delayed return on investment: If taking out a loan and/or doing renovation works, it may be several years before your property starts generating an income; though it may appreciate in the meantime.
Cannot be liquidated quickly: just like buying a property is a lengthy process, selling it is just as time-consuming.
Monthly mortgage payments: These will force you to appropriately budget to meet them every month, meaning it’ll be important to set aside the necessary amount. The same constraint does not apply to the financial markets, where you can invest sporadically.

As a wrap-up note, it is also possible to be exposed to the real estate market at a low entry cost. This is what Real Estate Investment Trusts propose. They allow you to buy shares in real estate projects, in a similar mechanic to ETFs in financial markets. Note they come with their own pros & cons, which are important to be aware of.

4. Other Investment types

In this last section, we briefly cover some other investment types worth knowing. We’ll link pointers where appropriate for more details. If stocks and real estate are familiar to most, other options may be available to you:

Workplace pensions: If your employer offers a pension scheme - where you invest part of your monthly pay into an account you won’t be able to access until retirement -, it may be a worthwhile investment to look at. Indeed, employers often match the pension contributions their employees make. Meaning, if you contribute 4% of your monthly salary to the pension account, the employer will match this 4%, essentially doubling the money you invest. This can be very beneficial and we would recommend signing up for pension contributions if your employer proposes it. Here are some details for the US, UK and France.
Life insurance: A legally binding contract that pays a death benefit to the policy owner when the insured person dies (Investopedia). They sometimes are tax-advantageous, which can make them attractive.
Crypto assets: We couldn’t do an episode on investing without talking about cryptocurrencies and NFTs. It is a market rife with excitement and opportunities, which has sometimes shown impressive returns. Today, however, it remains a poorly regulated market, which will therefore require an in-depth study of the projects in which you wish to invest. Do Your Own Research. Additionally, as we have seen in recent months, cryptos are not a crash-proof market. It is just as, if not more, volatile than the stock market, and interestingly, both are somewhat correlated. Finally, online security is critical for crypto assets. We have seen numerous stories of crypto account hacks in recent months.
Angel Investing: Usually considered last (i.e. once you have planned out your investing strategy and are well on your way to achieving your investing goals), as the risk is much greater (article). Angel investing is typically the way startups are primarily funded. An angel investor invests in a startup, usually in exchange for company ownership.

Conclusion & outro

Here we are at the end of the 4th episode of this Jeune Investisseur mini-series. Key points today:

Several options exist for investing and there is no perfect portfolio. Personal experiences, your circumstances, and your risk appetite will guide you toward the markets you’ll want to invest in for the long term.
Better late than never: It’s never too late to start and compound interests are your friends.
Re-clarify your investment strategy as your medium and long-term goals evolve, change, and become clearer. Long-term investing can allow you to be exposed to riskier markets with greater returns. Other markets can offer fewer risks for smaller returns.
Make a habit of reading the financial press and interpreting the major events that make the headlines in light of your investments to grasp the implications for your portfolio.
If in doubt, do your research and consult an independent financial adviser if needed.

We hope you enjoyed this series! Cheers! 👋

François & Vincent

Cover photo by Liza Summer from Pexels