This post was sponsored by MoneySENSE, the national financial education programme spearheaded by the Monetary Authority of Singapore.
Curious about investing? Check out the My Money @ Campus seminar on 21 October!
Investing. It’s a word that gives the financially unsavvy the shudders, with all its underlying complexity, financial jargon and mind boggling numbers. Yet it’s also a word that promises the possibility of financial rewards, if we could just put in the effort to know what investing is and how we can start.
Why we should start investing early
We already know the golden rule about saving diligently for the future. But we’re a lot more reluctant when it comes to investing because of the time and effort it takes to pick up this essential life skill.
Yet the best time to start is right now. The earlier you begin, the easier it’ll be to meet your financial goals — like that month-long trip to Europe you’ve been planning since you were 18, or the car or bike you’re KIV-ing for your future. When we start young, the money we put in can accumulate over time; in other words, we have a longer investment horizon*.
Let’s say you started investing at the age of 35, putting in $2,000 a year with a 3% return. You would’ve earned $98,000 by the age of 65. But if you had started at 25, you would’ve earned $155,000 – or over 50% more. This happens because the investment returns provide you more funds to invest (re-invest), producing even more earnings for reinvestment – and the cycle continues!
Once you’ve saved a portion of your income, set aside an emergency fund equivalent of six months’ of your monthly expenses, and bought basic life and health insurance, it’s time to start your investment journey!
Here are 3 simple steps you can take today:
Step 1: Know the fundamentals
Like learning any life skill, it’s important to know the basics – in this case, key investment concepts and principles, such as how return and risk are related, how to manage risk through asset diversification and allocation, and how dollar cost averaging differs from market timing.
Hold up – I already see your eyes glazing over. But trust me, the more you read up on and familiarise yourself with investment vocabulary, the easier it gets.
Common concepts include:
- Investment horizon refers to the time you have to achieve your financial goals. The earlier you start, the longer your investment horizon – which means the more time you have to grow your money through the power of compounding.
- The risk-return tradeoff. All investments come with risks. In general, investments that offer potentially higher returns expose you to a higher risk of loss. Be careful of investments that offer high returns while promising low risks; if something sounds too good to be true, it probably is. Always ask how much money you can lose. Then ask yourself if you can afford this.
- Asset diversification. Basically, putting your eggs in different baskets. By investing in different asset classes (like bonds, commodities and properties) and spreading them over different markets and industries, you can reduce the risk of losing all your eggs at once, and increase the chances of seeing some of them hatch. Different assets also behave differently relative to one another, so properly diversifying can provide an optimal risk/return. Deciding what proportion of your investment portfolio is going to be invested in different asset classes is known as asset allocation.
- Dollar cost averaging (DCA) is when you invest a fixed amount every month, regardless of how well the market is doing. If a share price is higher than the previous month, you buy fewer shares with the fixed amount. If the share price is lower than the previous month, you buy more shares. This gives you a degree of insulation from market volatility. In contrast, market timing is when you buy or sell shares depending how favourable you think the market is. The problem with this approach is that it’s hugely difficult to predict market trends on a day-to-day basis. Instead, you’re recommended to take a more disciplined approach by investing the same amount of money at regular intervals instead.
If you want to learn more about investment basics, there are a ton of resources online. Examples include MoneySENSE, the national financial education programme spearheaded by the Monetary Authority of Singapore and online courses on Udemy such as this one offered by the Institute for Financial Literacy. Look out for investment workshops and talks targeted at tertiary students – like My Money @ Campus, organised by MoneySENSE exclusively for students interested in investing (click here to learn more!).
Step 2: Consider your options
From bonds to blue chips, there are plenty of investment options to pick from. Just like concepts, the options can appear daunting at first, but less so once you know what they are.
First off, start small. As investment noobs, consider simple, low-cost investments such as shares, bonds and exchange traded funds (ETFs).
Here’s a simple introduction to these investment options:
A bond is essentially a loan for which you are the lender. The organisation “borrowing” from you is the issuer of the bond. The issuer promises to pay you back the original amount (known as “principal” or “face value”) at the end of a fixed period (known as “maturity date”).
Bonds are also known as fixed-income securities, because most provide an interest income (known as “coupons”) throughout the term (or “tenure”) of the bond. One example is the Singapore Savings Bonds issued by the Singapore Government.
A stock (also known as shares or equity) is essentially a stake in a company. Shares are mostly traded in board lots of 100 in Singapore. If a share is priced at $1, you would pay $100 to invest in one lot of shares (excluding transaction costs).
When you buy a stock, you become a shareholder of the company with claims on the company’s assets. Profits the company make are sometimes paid out in the form of dividends to shareholders, or you can choose to sell your shares at a later date for a profit when the share prices rise.
However, not all companies are growing, and not all make money too. When the company is perfoming badly, the value of the stake you have in the company may decrease.
“Blue-chips” are companies that are regarded by the market to be well-established and financially-sound, whereas “penny stocks” are typically growing companies with low trading volumes and hence, are more volatile in nature.
A fund is a vehicle where investors pool money together, and pay fees to a manager to manage the funds on their behalf. Given the large pool, managers can invest in multiple assets (like bonds and stocks), thereby providing investors with exposure to multiple assets – even though they may not have a lot of money to invest. In this way, investors can benefit from diversification.
It gets a bit complicated, but these are 2 main types of funds that you should know about:
- Unit trusts are funds managed in an active manner. This means that fund managers do the research and try to select the right stocks or bonds to invest. There are many types of unit trusts available (e.g. China-focused, US bond-focused), and each has its own investment objective and approach – like what markets/themes they will focus on. Make sure you choose one that you understand and meets your own objectives. Given the work the fund manager has to do, the fees to the manager are generally high.
- Exchange traded funds (ETF) are often funds that passively track an index, such as the Straits Times Index (STI). An ETF aims to produce a return that tracks or replicates a specific index. For example, the SPDR (pronounced “spider”) STI ETF tracks the STI, which in turns reflects the performance of the top 30 companies listed on the Singapore Exchange. ETFs are traded on stock market like a stock and allow you to gain exposure to the performance of the index. More importantly, since ETFs passively mimic an existing index, the management fees are lower than unit trusts. But watch out for ETFs which use derivatives to track an index. These are complex and you need to understand the risks.
Ultimately, what you decide to invest in depends on your investment horizon and income, investment objectives and your appetite for risk. Always remember to read up before you invest, and familiarise yourself with the range of investment options, so that you can build a diversified investment portfolio. (Source)
Step 3: Open your Central Depository (CDP) account (it’s free!)
The Central Depository is a place where all the shares you buy in the local stock market are ‘stored’. To open a Direct Securities Account, you have to be at least 18 years old. You can open your account directly at CDP or through a stockbroker.
Once it’s open, you’re ready to go!
The first step to investing wisely is investing in knowledge. Familiarise yourself with the basic principles and products of investment. Set your investment goals and objectives. And once you’re ready, set up your CDP account.
Remember, investment isn’t about making quick gains, but about taking a calculated risk.
“Do your research before you jump in. That means getting your foundations right and understanding how to analyse investment opportunities. That requires a bit of work – attend courses, read on the net… [and] gear yourself up to what’s happening. It’s not going to come easily just like that. Investing is for the long haul, thinking about your future, putting your money where you see results down the road.”
– OCBC VP of Wealth Management Vasu Menon
To begin investing in your future, check out the upcoming My Money @ Campus seminar on 21 October!