Take this before you go: A must-read guide for budding investors

It’s no secret that folks young and old alike enjoy seeing their wealth grow. The former group has a lot to gain from accumulating wealth, from being able to purchase that dream home to hosting a wedding to remember. For the latter, wealth accumulation translates into a worry-free retirement filled with travel and hobbies aplenty.

It’s little wonder then, that 52 per cent of the Lion City’s population above 16 years old are investing in stocks or equities, according to a poll conducted by market research firm Milieu Insight. On the other hand, 20 per cent of respondents mentioned that they do not own any investments. The top reason for this? Not knowing where to start.

It’s understandable, given that there are so many options right now. Even cryptocurrencies are starting to gain favour with institutional and retail investors alike. However, this also means that there’s no better time to start investing. The first steps are indeed the hardest to take, so here’s a full guide containing everything you need to get started.

What’s the difference between saving and investing?

Savings are monies that you set aside for emergencies. These need to be liquid – that is, you must be able to get the cash from savings on short notice. An example would be some extra cash stored in a current account that you could grab whenever you want.

Investments serve a totally different purpose. Investments help you hedge against inflation (i.e. growing your money to match the rising cost of living) and increase your wealth to last throughout retirement.

This means investments are not meant to be fiddled with, except for tasks like portfolio rebalancing. If you get into an emergency, one of the worst things that can happen is having to cash out your investments.

How much do I need, then?

Fortunately, you can start investing right after you’ve built up an emergency fund. Having at least three months’ worth of income saved up helps prepare you for any unexpected personal crises and allows you to invest in riskier assets.

Furthermore, when all your money is tied up in investments during unexpected times, you may have to withdraw funds when the markets aren’t performing well or when your assets haven’t reached maturity – exposing you to hefty penalty fees.

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From there, you can either invest regularly or save up a lump sum before putting your money down. The former method is called Dollar Cost Averaging and there are investments that allow for a monthly deposit starting from just $50. As for the latter, it’s dubbed Lump Sum Investing. This strategy requires a much larger deposit, mostly due to the asset’s price.

Neither strategy is superior but the latter is necessary if you want to invest in certain ways. For example, being a landlord or trading derivatives.

What can I invest in?

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Once your emergency fund is ready, you can start looking at Exchange Traded Funds (ETFs) and blue chip stocks. ETFs are akin to mutual funds, but units can be bought and sold much more easily and they have lower management fees. Blue chip stocks come from companies with the highest market capitalisations (basically the most ‘stable’ firms in the market).

Investing in these products only requires as little as $100 a month, and can be done through banks that offer blue chip investment programmes. If you would like something more newfangled, you can invest through robo-advisors. These platforms automatically allocate the funds invested across a variety of assets depending on your risk appetite.

One crucial rule to live by would be to avoid investing in what you don’t understand. For example, if you cannot understand the commodities market, you may have trouble understanding why low oil prices are a serious threat to finance and coal mining companies.

What is an ideal rate of return?

Singapore’s inflation rate is currently hovering around 3 per cent to 4 per cent each year. If your investments produce returns below that, you are still effectively losing money. Therefore, your annual rate of return should be 5 per cent at least. In the long run, this helps you to hit crucial financial milestones and prepare for retirement.

You might be able to rely on savings alone to retire, but you’d need a lot of money to be able to do that. You need to stash aside enough money that, even with inflation, things like rising medical costs and diminishing income can be overcome. It’s not impossible if your income is S$15,000 a month or more but it’s hardly an easy or comfortable way to live.

What are the risks of investing?

As you start to build your own investment portfolio, you will soon learn that you need to make a choice between diversification and concentration. Do you concentrate all your eggs into a few baskets, or do you diversify your risk and keep your eggs in many baskets?

Keeping your investments concentrated in a few assets can help you maximise return on your portfolio. But what happens if one of the investments turns out to be a dud? It can have a huge negative impact on your investment portfolio. That’s why diversification is key.

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The advantage of diversification is that it reduces the volatility of your portfolio and the potential risk. Even if a few assets are doing poorly, it will be compensated by the superior performance of the remaining assets. However, diversification is not without its risk too. Over-diversification can water down the gains on your investment portfolio.

In conclusion

Investing can be compared to quality relationships, as both require patience and time. Currently, there are more investment options than ever before, with new ones regularly streaming in. Before you make a choice however, you must first determine your investment profile. Then, you need to research various instruments before selecting those that fit your purposes.

Remember, investing is not a get-rich-quick scheme. Time is needed for your investments to grow and for you to hone your skills as well. As you improve, so will the quality of your portfolio. It’s a rewarding journey in more ways than one, so take your first steps. It only gets easier from here.