With the new year just around the corner, many eager investors will be looking to attend market outlook and trading seminars organised by brokerage houses and “market gurus”. Are you one of them? Are you going to invest based on their recommendations, thoughts or trend analysis for 2017?
Let DollarsAndSense share some pointers before you get sheered into the sales-and-marketing tactics of these seminars.
1. Know yourself
Knowing yourself is the key to finding a trading/investing style that works for you. Not many people understand the level of emotion at stake when one trades or invests. And this is the reason why many fail in their investments and end up losing money, and faith, in the markets. They allow their emotions to control their decisions and hence, tend to react impulsively.
Let’s try this exercise below. Answering the following questions may give you a better insight as to whether you have the temperament of being a passive or active investor.
a. Are you someone who’s almost always too busy to monitor market volatility? Or are you someone who is able to sneak a few minutes of every hour or so to monitor the market?
b. Are you a thrill-seeker always going for the scariest rides in a theme park? Or are you someone who prefers no surprises and cradles the comfort of daily routines in your life?
c. Are you a retiree or a 25 year old fresh grad ? Do you have a fixed savings plan? Or do you rely on a lump sum payout for your investments?
From the answers you give to the questions above, it should already be apparent to you what sort of investor you really are. The table below gives you a sample of the characteristics of a risky and passive investor. Note that you do not need to have all the characteristics to qualify as a particular type of investor. Just remember these words from Hamlet, “ to thine own self be true”.
|Risky investor||Passive investor|
|Young and impatient||Older and cautious|
|Aggressive approach to making wealth||Guarded approach to making wealth|
|Lump sum investment||Small incremental investment|
|Have the time to watch markets||No time for market watching|
2. Have a plan
Now that you have identified the kind of investor/trader you are, let’s move to the investment plan.
For passive investing, there are many types of investment vehicles you can utilise to build your wealth.
1) buying and holding stocks for at least a year;
2) ETF investing; and
3) the currently popular REITs investing.
If you are able to invest more time and energy to identify the prospects and fundamentals of stocks and love poring over research reports and annual statements, then, the buy and hold strategy would suit you. The returns from this form of investing might yield a higher return (theoretically) than say, ETFs or REITs investing. We call this, value investing. It is to buy at a steep discount upon identifying the intrinsic value of the stock. You might decide to hold the stock until it rises XX% above its intrinsic value or until its fundamentals changes.
If you are really not comfortable in picking stocks or just have no interest in learning to interpret companies’ fundamentals but still wish to receive market returns on your investment, then ETF investing might be the best way to go. Currently, SPDR’s STI ETF has delivered a 1-year returned of -2.95%, but over the course of 10 years, it has delivered a return of 3.45%, and since inception in 2002, it has delivered a return of 6.48%. This shows you the power of the buy-and-hold strategy. Currently, four companies offer STI ETF monthly investment plans.
OCBC Blue Chip Investment Plan (BCIP)
Maybank Kim Eng Monthly Investment Plan
POSB Invest Saver
Phillip Share Builder Plan
What about REITs? Simply put, they are legal entities created to purchase and manage real estate assets with a view to generating income for unit holders. It allows investors access to real estate assets and share the benefits and risks of owning these pooled assets to receive income at regular intervals (ie: quarterly, semi-annually or annually). Currently, as of January 2016, SGX has 39 listed REITs, Property Trusts and Stapled Trusts under various categories likes, residential , industrial, retail, office, hospitality and other specialty sectors including healthcare. How then do you decide on investing in this instrument? Well, it would require both combination of stock picking skills and the ability to sit tight and hold on.
However, if you have identified yourself as an active investor, then you have a few choices going about it as well. Using technical analysis, punters aim to capture short term movements for a quick profit. There are (1) day trading (contra), (2) Swing/ momentum trading, (3) index trading. What is day trading (Contra)? It used to be a popular scheme for local punters to do day trades in SGX. It allows the punter, Trading + 2 day to settle or receive the differences without having to collect or deliver the securities immediately. This is a risky strategy that is used for capturing short term momentum moves in the market like a breakout.
The other form of active investing is the act of actively picking stocks based on swing trading strategies. This could be for a time frame of five days to three months. The trader must always identify a stop loss, to prevent wiping out his/her account. One should also consider the risk to reward ratio by calculating their risk to their potential reward to determine if the trade is worth taking.
Index trading is one of the more risky and active approaches to growing your wealth. It requires technical analysis knowledge to trade the gyrations of the market. One could use Contract For Difference (CFD) or warrants to trade the index. A note of caution: warrants is not a popular product amongst traders, as such trading volume is usually thin, which causes liquidity risk.
3. Stick to the plan
Once you have identified your style and your trading strategy, STICK to it!!! More often than not, most people might choose to be a passive investor at the start of their trade. Then, they will be sucked into the hype and media reports of big moves in the market by the middle of the year. Not wanting to miss out on those returns, these investors will change their initial strategies either because they are making small losses or not making the big returns they “should” have made, had they chosen to buy and sell more actively. What comes next is probably more pain, losses and regrets.
A good quote from Jesse Livermore, one of the greatest traders to have lived according to Investopedia, comes to mind, “It never was my thinking that made the big money for me, it always was my sitting”.
Have a trading journal and log all your trades and decisions for review at a later date to see if you have stuck to your initial decisions.
Review and Improve
The last but the most important of all, is to review your end year performance. In most companies, a year-end appraisal is done to determine one’s performance for the year. Likewise, conduct a year-end review of your trading performance. Go through all your trades and your decisions (from your trading journal). Is it a viable strategy? Benchmark it to the STI. Has it underperformed or outperformed the index? How has it done compared to your other investments? – ie: CPF accounts (yield 2.5% and 4.0% for your Ordinary Account and Special Account respectively). Yes, CPF is an investment too! Having all these information allows you to improve or change your trading strategy for the next year.
You do not need to pay huge amounts of money for some guru to tell you what they see in their crystal balls. Know yourself and acquire the financial knowledge to improve your investment decisions.
How are you going to invest in 2017?
Bonds and Fixed Income