Saturday, 13 August 2016

Investment Guidelines For Singaporeans

As we start a new year, it might be pertinent to revisit some timeless pearls of financial wisdom. There would be bull and bear market cycles, periods where value stocks outperform growth stocks and vice versa, times where the most obscure investment fads come and pass us by. However, it might be good to hold dear to hear the advice that Charles Ellis had for his grandchildren in an article “My Investment Letter: Words of Advice for My Grandchildren” exhorting them to always invest for the long term, diversify their investments and ignore the day-today gyrations of the markets.

The 12 investing guidelines that Ellis wished he had when he first started on his investing journey:

Always invest for the very long term
If you are someone young who is still in school or just started your working career, this is probably the most important advice that you can hold dear to your heart. The equity markets might rise by 70% in a year and crash by 30% the next, there might be flash crashes and panics and all sorts of other investment bubbles, but historically the highest average returns are achieved with stocks. If you consistently allocate a portion of your monthly paycheck to stocks, you will almost definitely be in a much better place fifty years down the road.

Diversify your investments widely
Diversification is perhaps the only “free lunch” in the world of investing. Spread your risks out as no one truly knows what the price of a stock would be a year down the road. Moreover, most investors are professional money managers managing large sums of money, and it’s going to be hard to beat them at their game.

Ignore the day-to-day and the week-to-week price gyrations and news reports
The markets will always try to excite you with those rising prices or upset and frighten you when those prices, but keep your calm and focus on building long term investment value.

Minimize trading to minimize costs
All those little fees eat into your returns, just remember your broker gets paid no matter if you win or lose money.

Consider low cost indexing
Buy an exchange traded fund (ETF) that replicates a broad market index e.g. the Straits Time Index for Singapore of the Jakarta Stock Exchange Composite Index for Indonesia. Buying ETFs offers broad diversification while keeping fees low.

Beware of fees
Read the small print. For many mutual funds and investment products, there might be administrative fees, early termination charges and all sorts of other fees that might individually seem insignificant, but all of these ultimately add up.

Understand investment history
Index funds have historically achieved higher long term returns than actively managed funds, and at a much lower cost.

Active management can be exciting or painful
The asset management world is now flooded with investment talent, and they have become the “market” and simple mathematics would dictate that only half of them would be able to beat the market. It has become increasingly difficult for active managers to consistently outperform the market. Even if this is possible, it is virtually impossible to figure out in advance who is going to be the next Warren Buffet.

Understanding yourself
You are often your greatest enemy. Figure out a long-term investment program that is best suited to you: your financial resources, your spending objectives, your time-horizon and your ability to stay the course.

Try to avoid these 3 mistakes
  • Trying to beat the market
  • Borrowing on margin to beat the market
  • Buying after stocks have gone up (and selling after stocks have gone down)
Try to get the “whole picture” when making financial decisions
Think about your entire financial portfolio which should include insurance, real estate and other assets that you own. Think about increasing your own “capital”, as you build skills and experience as you progress the career ladder.

Saving and time are a very powerful combination
Saving is the first step to investing, and compounding has been described as the eighth wonder by Einstein. Imagine if you save $1,000 at an annual compounding rate of 5%, you would have $1,629, $2,653 and $4,322 in 10 years, 20 years and 30 years respectively.