How often have we watched movies like The Wolf of Wall Street or The Big Short, idolatrising the financial market and its wealth opportunities? However, the tendency is always to see that world as something unreachable, either because of the knowledge needed to work in that sector or due to the initial investment required to start trading and making good money. It may come at your surprise if I say that these are just taboos.
Coming from the Italian countryside, we have complicated relationships with traditional banks, especially in the last few years when many went bankrupt, ripping away life savings from entire communities due to biased advisors and a system of incentives which does not benefit the final consumer. Many people were contractually required to buy stocks or bonds when opening a bank account or asking for a mortgage, which could have been rejected if people did not comply with the bank’s requests. Financial institutions had the freedom of choosing the investments to focus on, by using their customers’ money: this led them to build the bank on weak foundations, which collapsed after a few years.
Possibly, our own parents invested some money in the past, in all likelihood through a financial advisor on which they entirely relied to take care of their money. With the advent of the internet, this has become superfluous: with all the online libraries which are available to be consulted, one has a free university in his hands, not to talk about online trading services with deficient fees. Right now, it is possible to inform ourselves by consulting various and different sources, enabling us to compare different opinions and form one on our own, without relying on biased judgments of other intermediaries.
Nonetheless, you cannot crowd away from the risk factor that scares most people and ends up being the decisive factor in deciding whether to invest or not, except that you can. Looking at the possible investments (we will keep it basic) we have stocks (also called shares) or bonds. While a share represents a stake of ownership of a company, a bond is a form of financing in which a company is supposed to pay back the full debt (and in some case regularly paying some interests called ‘’coupons’’ as well). Stocks are considered riskier because of the nature of the investment itself since they are more volatile, and there is no certainty about future cash flows. However, they are proved to provide higher returns (especially in the long term) if compared to bonds, which generally have fixed pre-established coupon rates and are resilient to changes in the market. It always comes down to a trade-off between low but safe or high but risky. But what if you could have both?
This is when funds come into play. Funds are a collection of different types of investments, which are typically diversified (some more than others) in order to lower the risk. They can be either mutual funds, which are ‘’actively’’ managed by managers and pools money into various securities, or an index fund, which is designed to track indexes like the S&P 500 and are considered ‘’passive’’. Warren Buffet himself often praises the use of funds over other types of investments, asserting that they are ‘’the only type of investment which makes sense all the time’’.
As a consequence to the lack of trust in banks, the low interests offered by them and the new opportunities entailed on the internet, more and more people are starting to invest, mainly thanks to its low cost and the possibility of starting with little capital and safe investment. Is this the end of the financial sector as we see it nowadays?