Investment: Definition of business investment

You've made up your mind: you're going to start investing.

After years of letting your money sit in your Livret A, you're ready to take the next step.

But now you're facing a whole new problem: knowing exactly what to invest in.

This is where the fear of making a mistake takes hold of you. And that's normal: it's an important decision, not to be taken lightly.

Especially since there are several things to consider and keep in mind when it comes to investing your money.

In this article, I will give you some tips on what to invest in the stock market, and how to choose investments that really suit you.

How to know what to invest in?

You may have already heard people you know, at a party or during a family meal, say that it's now or never to buy Tesla shares, or that LVMH is not worth it anymore.

You wonder how those around you manage to seem to know what to invest in. Especially since they seem to know so much about it, right?

And you're wondering what to invest in for your first steps in the stock market.

There are several things to consider. And the first is that investing in the stock market is often not quite what it seems...

Should you buy individual stocks?

That's the impression we often get when we start investing in the stock market: buying individual shares of certain companies (like Apple, Tesla, etc.).

However, this is far from the only solution - and not necessarily the most effective one either.

Buying individual stocks is often counterproductive, especially if you're new to the stock market, but not only.

Don't panic: this doesn't mean that investing in the stock market is a bad idea at all.

It just means that there are other strategies that will surely allow you to invest more efficiently.

First, let's focus on buying stocks directly.

Choosing to buy individual stocks (for example, buying Apple shares) is called stock-picking.

And while the name may sound sexy, unfortunately, it's rarely the best thing to do.

Every time you buy an individual stock, you're essentially betting on the success and performance of a single company (or a few if you buy a few stocks).

As you probably know, I don't recommend buying individual stocks.

First of all, the risks of having all your investments linked to the performance of only a few companies are too high (if these companies fail, you lose everything).

And on top of that, choosing the right companies to invest in is much harder than it looks - even for professionals. It's not just about investing in companies you "like" or that are "doing well".

In this case, investing is more like playing the casino than it is about making money work for your future.

Note

Many people who buy individual stocks are also trying to do what is called "market timing".

To put it simply, they try to buy stocks when the price is low and then sell them at a profit once the value of the stock has risen.

Not only does this involve buying and reselling costs that can weigh heavily in the balance, but it also doesn't work in the vast majority of cases.

Adopting a "buy and hold" strategy (yes, there are a lot of anglicisms in the stock market!), i.e. investing for the long term without trying to buy or sell according to what the stock market is doing, is generally a much better strategy.

This brings us to the other ways to invest in the stock market without buying individual stocks...

Invest in mutual funds 

investment funds (or mutual funds) are the ones we talk about through strange acronyms like UCITS (or SICAV or FCP, which are types of UCITS. CFQD!).

But how they work is not that complex.

But how they work is not all that complex.

Simply put, an investment fund is a collective investment scheme.

It collects and pools money from many investors. It has the ability to buy many shares in many companies, and then distribute the gains among the different investors.

By investing through a mutual fund, you delegate your investment decisions and the management of your money to a professional.

It is not you who directly chooses what you invest in, but the fund manager who makes the decisions about which stocks to buy or sell.

However, you can choose a fund that invests in a particular sector.

Note

The two most common types of mutual funds are SICAVs and FCPs.

Technically, their operation is quite similar.

Their difference is mainly in their legal status, but it is quite invisible for the investor (except for some investments that are only accessible from FCPs).

Can you really beat the market?

Investment funds generally have a simple objective: to beat the market.

That is, to outperform a stock market index (for example, the CAC40, which includes the 40 largest French companies).

To do this, they generally adopt a management style known as active management: they buy and sell shares regularly to hope to obtain better results.

You may be thinking that this is a good thing. Who wouldn't want to earn more money, and let the pros take care of everything?

The problem is that most of the time, the professionals can't beat the markets.

The vast majority of funds fail to beat the market, and therefore underperform their own benchmark.

And if some of them do beat the market... the problem is that they can't keep doing it over several years.

For example, in 2020, SPIVA showed that 87.2% of investment funds underperformed over the previous 15-year period*.

Not to mention that the fees to compensate the people behind the funds are much higher than some other types of passive investments.

And over the long term, even if it seems like a 1% difference is not much, the fees can really weigh heavily on your investments.

This brings us to another interesting investment solution, this time in passive management...

Investing via ETFs

Note

Technically, ETFs are UCITS, but their functioning is quite particular. We distinguish here the two for more simplicity.

ETFs (or index funds) are funds that are made up of a basket of stocks that you can buy or sell, as you would with a single stock.

Unlike mutual funds that seek to beat the market, ETFs seek to replicate the performance of a stock index. No more, no less.

Example

If you decide to invest in a CAC 40 ETF, this ETF will be composed of shares in the 40 companies present in the CAC 40.

Logically, the performance of the ETF will therefore be similar to the performance of the index (in this case, the CAC 40).

The vast majority of index funds are passively managed: the fees are therefore generally much lower than those of traditional investment funds (you don't have to pay all the people whose objective is to make sure that the fund beats the market).

It is therefore often a very good solution when you are wondering what to invest in the stock market to start with (and even once you know more about it!).

Choosing what to invest in depends on your goals

You might have expected that when you clicked on this article you would be given a list of stocks to buy to make money easily and without too much headache.

But deep down, you might have guessed: nothing is as simple as that (contrary to what some would have you believe).

Because when it comes to investing your money, everything depends on your situation, but also and above all on your objectives.

These are the ones that will determine two important things:

• The tax envelope in which you will invest. That is to say simply the "type(s) of account" that would be interesting for you (life insurance, PEA, etc.) Each one has its own restrictions, which it is essential to know before starting to invest. To have a detail of the different tax wrappers, read our article on how to invest in the stock market.
• But also the supports on which you will invest your money. This means knowing which stocks, investment funds, or ETFs you will choose according to your situation and your objectives - especially the risk you are willing to take. Some are riskier than others, which is why it's important to determine your risk profile before you start investing.

You will not invest in the same way if you are 30 years old and want to save for your retirement, or if you are 25 and want to prepare for the purchase of your primary residence in the next 6-7 years.

Sometimes, depending on your projects, it is even important to ask yourself if it is worth investing your money in the stock market at all: it is a medium to long-term investment. If your projects are very short-term, it is often better to look at other solutions.

Note

You should only invest money that you do not need.

Remember to diversify

This is one of the key elements of investing, but many beginners don't really think about it: the importance of diversification.

Beware: investing always involves an element of risk, but diversifying your portfolio helps reduce that risk.

Diversification simply means that you can't put all your eggs in one basket.

This can be done in different ways:

• Investing in different asset classes (not just stocks, but also euro funds, or commodities for example).
• We've already talked about this, but avoid buying individual stocks, and favor funds that allow you to invest in many companies at once.
• Diversify company sectors and geographical areas, or even types of companies (large or small, etc).

Example
Let's say you love the aviation sector, and decide to invest only in funds or stocks that are closely or distantly related to aviation (such as Air France, American Airlines, etc.).

If the aviation market were to fall (completely randomly, say due to a global pandemic... or even a development that threatens the future of the airline industry altogether), you are far more likely to lose money - and your entire portfolio will fall.

If you had invested in other sectors, or in certain ETFs that allow you to invest in stocks from around the world, across all sectors, the chances of your entire portfolio falling would be reduced.

 Attention

This article is for information purposes only. Before making any financial decisions, consult a (real) financial advisor.

Investing carries a risk of loss.