Most people choose not to invest because they think it’s daunting and complex. They also heard and read stories where people have lost their life savings on bad investments.
But if you invest prudently, this is hardly ever the case. In fact, investing is the one of the easiest and most accessible methods for investors to build their portfolios and to grow their wealth over time.
Investing Can Be Simple
Investing can be complex, but that’s only for people who want it to be. These guys are usually traders (or people who think they have to copy traders) who scrutinize every price movement, every stock, every day.
But investing can also be simple, for people like us, who have real day jobs we actually have to do even while we build our portfolio.
The first way to simplify investing is to either give our money to financial advisors or invest it in mutual funds managed by professionals. But this will mean a substantial proportion of our returns being used to pay these financial gurus. We do not recommend this – many studies have shown that these so-called gurus cannot beat the market returns anyway.
The more logical method is to aim to receive market returns on your investment. This tends to be the smartest option if you want to invest over the long run, i.e. buy-and-forget…for the next 20 to 30 years.
Read also: Investing In Companies That You See Around You
Starting Your Investment Portfolio
The next logical question to ask is how to achieve this. You need to know your investment is safe from completely failing as the last thing you want is to check back in 20 years later only to realize that the company(s) you invested in went bust years ago, while you were in the “forget” stage.
The answer – index funds and/or ETFs.
These funds have low management fees, usually under 0.3%, and offer superior diversification. Many index funds are also traded on our local or foreign exchanges, this means you can readily buy and sell them on the market and incur minimal transaction costs from doing so. One such example in Singapore is the STI ETF, which tracks the performance of the 30 biggest and best stocks listed in Singapore. You can read the link below to find out more.
Read also: How Does ETFs Investing Really Work In Singapore
Using the STI ETF as an example, you’re able to invest in the 30 biggest and best stocks of all time. Not just today, but also in the future. This happens because the index has defined “biggest and best” in a certain way that will ensure stronger companies are constantly added and weaker companies are removed over time. This means your portfolio is constantly being assessed and will remain strong over the long term.
Remember To Include Bonds
However, the STI ETF only exposes you to equities (or stocks). To build a strong portfolio, you would want to include in some bonds as well. As a rule of thumb, we can determine how much stock and bond we should hold by taking the arbitrary number 110 and subtracting our age from it. The result would show the proportion that should be held in stocks. Do note this is NOT a one size fit all equation for everyone.
The reason for this is that stocks tend to give better returns, but are also more volatile than bonds. And as you grow older, and are nearing your retirement, you want your assets to be less volatile.
If you happen to be 29 in 2016, you would have approximately 80% of your money in stocks, and that means roughly 20% in bonds. To buy bonds, there are also ETFs that are listed on the exchanges. We usually advocate you buy these funds as they are easier to trade.
Remember, this means you have to review your funds even in the “forget” phase to buy more bond ETFs or sell some stocks ETFs to buy bonds ETFs. You should aim to do this annually.
How You Can Get Started Today
At this juncture, we think it will be prudent for us to say that there are many ETF and index funds out there. Apart from tracking country indexes such as STI in Singapore or S&P 500 in the US, indexes could track sectors such as healthcare, consumer goods, real estate and even others. Similarly, there are many types of bond funds that you can choose from.
But there is no need for you to be scared of all these options and difference in products. Being scared of these choices is like going to NTUC to buy rice and then deciding not to buy any because there were 10 different types to choose from and you did not know how to differentiate them.
To get started, all you need is a basic “buy-and-forget” starter pack. This starter pack should consist of the STI ETF (such as the Nikko AM STI ETF) – you’re able to trade this on the exchange; it tracks the Singapore and regional market; and it’s diversified – and a Singapore bond fund (such as ABF Singapore Bond Fund) that holds AAA-rated government bonds in Singapore.
You can choose to add to your starter pack after you understand the industry better. Perhaps that can be a 2017 New Year resolution. The point we are trying to make is that you do not need to wait until you have Warren Buffet like investment knowledge before taking your first step. You can get started first on something reasonable and idiot-proof, before adding to your portfolio as your knowledge increases.
Maintaining Your Portfolio
Once you’ve identified your first two investments in equities and bonds, you buy and forget about them until next year. The next time you check your holdings, should be the next time you want to make your next investment decision or if you want to reallocate your current portfolio. We’re serious about not constantly checking in on your holdings. This will cause less stress and less impulse decisions.
Also, hopefully you have more information about where you want to go with your portfolio by then and can adjust accordingly. Perhaps you’re ready to invest into an index fund tracking a particular sector such as real estate or consumer products…perhaps you’re not, and continue to invest in the initial two funds. Whichever way, your investments will continue to grow and you will be armed with dividend payouts from these assets for your next investments. This is vital to reap an annual compounding effect from your investments to build up your portfolio over the long-term.
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