When we first become interested in investing, we naturally have questions. And as someone who has been talking with new investors over the last five years since starting my blog, I can tell you that there’s a decent amount of overlap in our questions. So in this article, we’ll take a look at a bunch of investing FAQs. Some of these stem from my inbox, and others from the Pearler Exchange.

Just so we’re all on the same page, none of this is personal advice. The idea here is to flesh out these topics and gain a greater understanding of the world of investing. Any specifics and how you’d like to use this information is up to you.

Alright, let’s begin!

Investing FAQs

“Are lower priced shares better for beginners?”

One of the most common investing FAQs when starting out. The price per-share seems like it matters when comparing options, but it’s largely irrelevant. Here’s why…

Let’s say you’re looking at two funds that both track the same index. Fund A’s shares are worth $100 each. It pays a yearly dividend of $4 (4% yield). Fund B’s shares are worth $1 each. It pays a yearly dividend of 4 cents (4% yield).

Whether you invest in Fund A or Fund B, it doesn’t really matter. One is not more ‘expensive’ or ‘cheaper’ than the other. In this example, the dividend return is the same on both options: 4%. And it’s the same calculation for capital growth.

Just because you can buy 100 times more shares of Fund B, you will not get 100 times the return. Think about that for a minute. That would make no sense. Aside from the performance of the fund or company, your returns are based on the number of dollars you have invested, not the quantity of shares your dollars buy.

Some people will point out that you can often reinvest your dividends more easily with lower priced shares. That’s true. But it’s not really an issue, because you’ll be buying more shares during the year anyway. Say it takes you a whole year to save up the $600 for a high-priced share IVV. This means you’ll ‘miss out’ on your dividends compounding for that year.

The effect of this is tiny. IVV is a low yielding fund, with a yield of about 1.5%. A single share of $600 may pay around $10 in dividends for the year. Having this additional $10 invested for one year could generate returns of maybe $1 (10%).

So this idea of ‘missing out on compounding’ is nonsense. It’s only true if you invest once and then never again, which is basically never the case. If that is you though, feel free to pick a different fund which is similar in nature. And for everyone else, get the dividends paid to your bank or brokerage account, and add it to your next purchase.

“How many ETFs should I have in a portfolio?”

This is a tricky one. It depends on what we’re investing in, our personal strategy, and how we go about implementing that strategy.

It’s important to consider the practicality of what we’re doing. The sensible amount of funds to have in a portfolio is the number you feel comfortable (and enjoy) managing on an ongoing basis. It also depends on you maintaining exposure to the investments you want.

For some people, this can equate to one or two diversified funds, like VHDG OR DHHF. For others, it’s more like four or five main funds, and a couple of others on the side (a core/satellite approach). So it really comes back to where you want your money to be invested.

It’s worth noting that if you’re a beginner, it’s typically simpler to begin with the foundations and go from there. Over time, you may want to add other investments. Having said that, I advise against making the investing process more complex than it needs to be. Take it from someone who made that mistake: more is definitely not better. So choose sparingly, and make sure there’s a good reason for adding each holding to your portfolio.

After all, each additional investment means more admin, tax stuff, mental energy, and ongoing time to manage.

“How do I decide what to buy each month?”

Firstly, we can make this decision easier by not overcomplicating your portfolio (see above!).

On the extremely simple end, you could take a minimalist approach and invest in a single diversified fund. On the over-enthusiastic end, you might have 10 or 15 holdings, with a combination of funds and individual stocks.

Let’s say you’re somewhere in the middle of the pack. You have five things in your portfolio. How do you decide which to buy or ‘top up’ each time you invest? It depends on a few things.

Do you have a ‘target’ in mind for each of these holdings, and the percentage you want each to represent in your portfolio? If so, then it’s pretty straightforward. You could set up Automate to invest in the ETF which is furthest away from its target. This will likely be the easiest and most practical approach to maintain since it becomes effortless after setting it up.

But if you’re investing manually each month, then it’s a little different. One option is to invest in the share which has performed the worst that month. This is because it often poses the best value of the group.

It’s similar to the Automate strategy above, but with no particular targets in mind. Another option is to simply take it in turns and invest in one share at a time - choose one each month for five months - then cycle back to the first one again.

There’s no right or wrong answer here. Just think about what you feel most comfortable with, and what you’ll find the easiest to follow.

“I’m focused on the long term, but there are lots of risks facing the world right now. What should I do?”

The underlying question here is whether it’s safe to keep investing given the uncertainty around. But here's the thing: this is always the case. When you hear things like ‘global uncertainty over X’… you should just smile.

Why? Because the idea that things are ever certain is laughable. The world may seem stable and predictable from time to time. Then you get a war, or a pandemic, or a recession out of nowhere. Things hit the fan from time to time.

In fact, it’s when things seem the most stable that something is usually about to go wrong. And when the risks seem at their peak, that’s often when things are about to improve.

The reality is, as investors, we have no choice but to accept the future is not certain. We invest anyway because it’s historically been the most sensible thing to do. To do otherwise is to effectively bet against the human race - which is a pretty pessimistic stance to take. In that case, you might want to load up on baked beans and build a bunker in the woods.

The thing is, if you’re pessimistic and correct sometimes, you’ll never build wealth because you won’t invest. If you’re optimistic and wrong sometimes, you have a strong chance of building wealth because you’ll invest anyway.

There are no guarantees with investing. Property, shares, cash, bonds, crypto, peer-to-peer lending…everything has its own risks and tradeoffs. We typically earn greater returns in ‘higher risk’ assets like shares and property over the long term, precisely because of the greater uncertainty in the short term.

“I’ve just started investing. How do I know if I’m on the right track?”

If this is you, congratulations! While it may not seem like a big deal, you’ve just taken your first step down a (hopefully) long and fruitful road to building long term wealth.

As for whether you’re on the right track, consider the following statements:

• Investing in diversified, low cost funds puts the odds of probabilities greatly on your side.
• Most of your progress in the first 5-10 years will come from saving and adding to your portfolio, rather than investment returns.

If you keep these two things in mind, it’s almost inevitable that you’re on the right track. The specific fund choices and how you go about them are less important than these two principles. So don’t overthink it - focus on the big things that really move the needle.

Final thoughts on investing FAQs

I hope you found this Q&A session helpful and interesting. There are plenty more questions for us to consider for future posts, given we’re all learning and sharing together.

If you have a question you'd like answered, feel free to post it on the Pearler Exchange. Someone like myself, other investors, or a financial advisor will chime in and offer their two cents. Remember, there are no silly questions. We all start with the same amount of knowledge - none!

How would you answer the questions we’ve tackled today? Feel free to leave a comment below.

Until next time, happy long term investing!