Stock investing is not for everybody. But with a little homework and planning it is possible to select a stock in a manner that reduces your risk and puts you in a position to benefit when its price rises.
There is a great deal of information available on publicly traded companies that can help you decide if its stock is worth buying. But it is a challenge to sift through all the data to arrive at the figures that tell you the real story about its performance and its prospects.
As an investor, the longer you keep your money on the account, the more you will make out of it. Elevation of your wealth each year is possible because of COMPOUND INTEREST.
With Compound Interest, you will not only earn interest on your principal deposit but also on any interest that is credited to your account. It helps your money to grow at an accelerating rate!
To better understand the concept, here is an illustration:
Say you invested S$50,000 to an account with a 5% interest per year. With the gains you made from compounding, how much would you earn in 3 years?
Year 1: S$50,000+ (S$50,000 x 5%) = S$52,500
Year 2: S$52,500+ (S$52,500 x 5%) = S$55,125
Year 3: S$55,125+ (S$55,125 x 5%) = S$57,881.25
Compounding adds up faster than you may think. As you can see, you earned S$7,881.25 in just three years!
Aside from its definition, here are some things you really need to know about Compound Interest:
1. TIME IS OF THE ESSENCE
The longer you keep your money invested, the greater the rate at which your initial investment produces returns. This is why it is advantageous if you started young. And if your “younger years” passed, the next best thing is to start now.
Calculate the possibilities of your accumulated wealth through a Compound Interest Calculator that is available here.
2. PEOPLE FROM ALL WALKS OF LIFE CAN BENEFIT FROM IT
You do not need to be as financially literate as the people on Wall Street or as rich as Bill Gates because almost any investment will earn a Compound Interest if you leave your account untouched. The same principle and rules apply whether you invested S$1,000 or S$1,000,000.
3. TAKE CALCULATED RISKS
Yes! Compounding is powerful in almost all the circumstances but, you must not fall into the temptation of getting higher returns through higher risks. Unless you know what you are doing, taking on the higher risks can potentially lead to a chain of bad decisions from now until you retire. It is important to take well-informed and calculated risks to prevent destroying everything you once built.
4. PATIENCE IS TRULY IMPORTANT
Compound Interest requires you to sacrifice today to obtain its benefits tomorrow. It only works if you allotted time and effort in growing investment. The results may seem small at first but, you must persevere.
Image Credits: pixabay.com (License: CC0 Public Domain)
Certainly, its future rewards are greater than the sacrifice.
Peter Lim is one of Singapore’s best known billionaires. Besides owning the image of Cristiano Ronaldo, the man is famed for his candid sharing and no nonsense remarks. Here’s some of the things we can pick up from him, even if we’re not high flying stock traders:
1. It’s Easier to Build than to Trade
“It’s very difficult to make money from trading. People who get rich are those who buy a company, build it, run it. Most of the traders, they come, they make money, because they have this gambling instinct. They take the money and spend it. The minute they lose money, they got no money to pay up.”
For those of you into equities, it’s a sober comment on stock trading. Most people won’t get rich doing it. If you have significant capital, maybe it’s better to consider setting up a small side business first – even if you don’t succeed, you’ll at least have a better understanding of how they operate.
For those of you who aren’t into equities, take it as a personal finance lesson. If you want to have a consistent income stream, don’t count on things like the resale value of your flat, or your gold and watch collection. You’ll have a more reliable shot at wealth by building a small side-business (however many attempts it takes).
2. Always be Braced for Losses
When you are holding stocks, if it goes up, don’t be too happy; when it goes down, don’t be too sad. Otherwise, how? Your life will also be fluctuating and you’ll die of a heart attack.
If you really lose sleep over it, maybe the best way is to keep the money in the bank.
What would happen if you bought S$5,000 worth of shares today, and you find they’re worth S$3,000 tomorrow? Would you have the ability to simply move on and chase the next dollar?
If the answer is no, you haven’t got the right mindset to get rich through trading. It is important that you have the psychological resilience to accept losses and gains (which carry their own perils, like overconfidence). It will also impact your career and happiness, if you feel a need to track your stock prices every 30 minutes.
If you don’t have the required sense of calm, then don’t get involved. Get a financial advisor to handle your investments, or keep it in your CPF (you’ll get better returns than from the bank).
3. Think Long Term When Investing
You have to invest with a longer-term mindset. You buy a good stock, leave it there for 10 years. Come 10 years, this dollar can be many, many multiples. I think the trick is really to think long-term. You may not have a lot of money, but you have a lot of time. The minimum length of my investments are five to six years, if not 10 to 12 years.
This is somewhat related to point 1. If you’re eager to trade and go for short term profits, you might get rich – but you’re making it much harder to do so. Remember, every trade requires two correct decisions: when to buy, and when to sell. Even if you get one right, you are likely to get the other one wrong.
For those of you who aren’t investing, this should be a call for you to start. Even a small amount of money, invested over 10 or 15 years in a reliable asset, can amount to significant sums.
If you invest just S$200 a month, at a return of 5% (achievable with most index funds and insurance policies), you would have over S$59,000 at the end of 15 years.
4. Don’t Just Work, Pay Attention to How Your Company is Run
Mr. Lim didn’t actually get a huge head start. Some of his early jobs were waiter, cook, and taxi driver. It was only much later that he became a stockbroker. During his rise, Mr. Lim learned a lot from the fast food chain Red Rooster, where he worked as a cook. Systems, management processes, logistics, accounting, etc. are all instrumental if you want to understand how well a business runs, and will come in useful when you want to invest or run your own.
So rather than just doing your job, poke your nose around. Find out how your company’s business model works, where it fails and succeeds, and which are the skills critical to its running.
5. It’s About Making a Good Deal, not a Good Sale
You make money when you buy, NOT when you sell.
Value investors already know this, but it’s worth a reminder. Rather than buy something and hope it grows in value, buy it cheaper and wait for it to return to its usual price. We especially love this one, because it’s so applicable in personal finance – taking the time to look for a better deal is the surest way to “make” money. Whether you’re buying a second hand car, or buying a melon at the supermarket.
One way to save money is to pay with a cashback credit card, which gives you a small discount on your purchases when you meet a minimum purchase amount. As long as your bill is paid in full each month, you always avoid paying full price. SingSaver.com.sg has a list of good cashback cards to get you started.
(This article is brought to you by SingSaver.com.sg)
Investment books often urge readers to do extensive research to identify megatrends such as social and cultural shifts that could make a potentially big difference in investing decisions. However, the real answer is never simple. The ideal way to value anything, including company shares, would be to plug yourself entirely into the real world, which means shaping your daily behaviours such that it enables you to maximise your exposure and learning about almost everything.
Given the increasing connectedness of the world and the rapid explosion of information, learning is no longer confined to any one medium or source. Therefore, keeping an open heart and mind is in reality the best bet to a lucid understanding of the dynamic and complex interactions across companies, industries and countries.
The flowchart below illustrates the types of personal behaviours that may help individuals to hone their stock investment skills.
Click to enlarge:
(This article is brought to you by Some Ideas on Investing in Singapore)
I’m going to share some of the ways that you can allocate your portfolio according to the different amounts of money that you are able to invest (those above your emergency fund and not needed for any big-ticket purchases).
Straits Times has done a similar article on this topic, How to invest if you have $20k or more (19 Jul), but I disagree with some of their recommendations (especially since I don’t really like the idea of unit trusts and prefer index funds)
If you have around:
$10,000 (or less) to invest….
You can place your money in index funds or an exchange-traded funds (ETFs), the latter can be bought and sold on the SGX like shares, but some of the funds are specified Special Investing Products (SIPs) and would require you to meet some criteria. This would give you diversification as investing in the fund will give you exposure to the different shares in the fund.
For example, investing in an index fund that tracks the Straits Times Index (STI) will spread your capital across the 30 shares that make up the STI, according to the size of the market cap of each company as the STI is a capitalization-weighted index.
$50,000 to invest….
Instead of investing in index funds or ETFs, if you are more adventurous, you can try investing in individual companies or REITs (but I think it’s still good to keep a good part of your portfolio in index funds or ETFs). Picking out individual companies will require a bit more time to research the companies on your own to pick out the good from the rest. The ability to pick out good companies will require some experience to master, but the potential returns will be much better than investing in index funds or ETFs if done well, but don’t try to do so if you’re not willing to put in time to learn and research as you may end up only paying “tuition fees”.
$100,000 (or more) to invest….
With this amount, you may be able to purchase all of the 30 shares in the STI on your own to avoid the expense ratios of index funds and ETFs and another advantage would be getting dividends as the companies pay them instead of waiting for the funds to pay them out. You may still incur some minimum brokerage charges if you try this, but if held over a long enough period, this would be cheaper than using index funds or ETFs.
Another advantage of not using index funds and ETFs at this point is the ability to buy shares that you think may outperform the market. Let’s say you think that the finance sector may not do so well in Singapore, you can cut out the finance stocks, such as DBS, UOB and OCBC, and go for the companies that you think will outperform the market.
You may also want to keep some of your portfolio in bonds and cash as well to better protect your portfolio should the market enter a downturn, you still have an income and cash to take advantage of the drop in share prices to buy into the market at the cheaper prices.
I think that this is a good way to invest if you have above $100,000, unless you have amounts in the millions in which case I have not much idea of how to invest in that region.
Summary
Overall I support index funds and ETFs as a good way for people with smaller portfolios to be able to access a wide diversification across different shares in the index that the fund covers. (You can see my post on indexing at: Thoughts on Indexing) As your portfolio grows, you may want to move into individual shares as they offer the potential for better returns and with your larger investment, it would make more sense to spend more time researching the companies (amount earned over time is higher).
When investing in the market, you may also want to practice dollar-cost averaging to ensure that you do not enter the market at too high a price and get your fingers burnt when the market drops, but don’t invest too small amounts such that you spend a large amount of your money on minimum brokerage fees. While it’s good to diversify to reduce your exposure to any one company, investing in too many companies dilutes the returns of the “winners” that you have chosen.
