Investing is a critical skill everyone should definitely learn. After all, you wouldn’t want your hard-earned money to be worth less in the future due to inflation.
Taking a look at a common bank savings accounts, you can get 0.01%-2% per annum worth of interest. However, if you calculate the real interest rate by taking into account inflation, you might be left with a real interest rate of 0 or even negative in times of higher inflation.
Saving is therefore an additive process; adding 100 dollars a month for 20 years to a 2% p.a savings account will give you a total of 100 x 12 x 20 = $24 000.
Investing, on the other hand, is a multiplicative process. If your returns average 5% a year, taking into account inflation of 2%, you might have a return of 3% a year, which leads to a total of over $33200 in 20 years.
Okay, so it is clear why investing is important, so how do I begin?
Well, you are in luck! In today’s internet-driven era, learning a new skill has become easier than ever.
With a plethora of free resources online such as Investopedia and various finance-related YouTube channels, and even articles from Digital Senior (ETFs vs Unit Trusts), you are able to build up your investment knowledge from the comfort of your own home.
So let’s say you have already done your research, and you have set aside your funds for investing. What should you look out for? In this article, I will be sharing 3 critical rookie mistakes one should avoid making.
Disclaimer: All investment opinions made in this article are based on personal experiences and are meant for informational purposes only. As such, information from this article shall not be taken as investment advice, nor is not a substitute for financial advice provided by a professional. While we strive to provide accurate and up to date information, by engaging in investments, it will be at your own risk.
1) Getting baited by complex financial instruments
You may have heard of nightmare scenarios where investors got burned over a bad investment, losing their entire capital, or even going into unrepayable debt such as this:
What if this happens to me? Is investing just too risky?
Fret not, as often times, these examples include individuals that are dealing with complex financial instruments such as options and derivatives, which often have contracts with a fixed expiration date all the whole utilizing financial leverage to magnify gains and losses.
What these individuals are doing isn’t investing based on sound fundamental analysis and proper long-term investing principles, but rather taking high risk speculative bets and hoping for the best.
To avoid these scenarios, new investors should avoid getting tempted by online advertisements such as Options and CFD trading platforms that promise free easy money by utilizing their platforms, as rather, it is a sure-fire way to lose money.
It is always important to remember that the stock market is a zero-sum game; for every winner, there will be losers. If someone makes a successful bet and has a 1000% gain from one trade, there will be 10 others losing 100% of their money.
Thus, it is advisable to stay away from complex financial instruments, and instead focus on index funds and blue-chip stocks, as the risk outlook is much lower.
2) Trying to time the market
You might have heard of the age old saying, buy low and sell high.
However, how good is this advice, really? I mean, it’s totally common sense to buy things at a discount and sell them at a premium. Yet, how many of us actually have the time to sit in front of a computer and stare at stock prices on a daily basis? Also, if it is so easy to do, why aren’t all day traders millionaires?
The reality is that it’s hard to time the market.
Like, extremely difficult. Try it out yourself on this market-timing simulator.
So okay, maybe you were able to time it well once, and successfully predicted the entry and exit prices to snag a quick profit.
However, are you confident in being able to replicate it again consistently?
With an insurmountable number of factors affecting the stock market, institutional investors such as hedge funds and investment banks turn to high frequency computer algorithm trading, which can execute trades in microseconds.
Thus, while attempting to time the market, you will be competing with all these institutional investors, who more often than not, win in the long run.
Does this mean that individuals should give up investing altogether?
Rather, investors should focus on time IN the market, rather than timing it.
Looking at the returns of an S&P500 index fund over the last 5 years,
If you had invested $1000 in at the beginning 2016, you would have about $1600 today, even though the market had declined in 2020 due to Covid-19. That’s a whopping 60% return on your initial investment.
What if you had instead tried to time the market, and stared at the market every single day?
Looking at this drop in 2016, it might have certainly looked like you were about to lose your investment, and you might make emotional mistakes such as panic selling.
Thus, it is essential to retain your long-term outlook at focus on increasing the time in the market for your gains.
3) Neglecting brokerage fees
Okay, so avoid complex financial instruments, and focus on a long-term investing outlook.
I’m ready to begin investing!
Not so quick!
Before you begin buying away, you need to think of your investment plan.
Are you going to put in a one-time lump sum, or begin contributing small amounts on a consistent basis?
Does it even matter?
Of course it does! Unlike in America where they have zero-fee brokerages such as M1 Finance or Robinhood, the brokerage platforms in Singapore typically charge significant rates for investments.
For instance, DBS Vickers charges $10 cash upfront for your buy orders, and $25 dollars for your sell orders.
If you are starting out investing with a small amount of money, e.g. just buying 1 lot of CapitaLand Mall Trust (C38U) Shares @$2.15/share, the $10 fee would be 4.6% of your initial investment, before taking into account other miscellaneous fees.
Moreover, if you are familiar with the concept of diversifying your portfolio and want to buy shares of companies in other sectors, you will need to pay the $10 commission each time.
Though $10 might not seem like a large sum of money, it all adds up!
What if you want to engage in dollar cost averaging, and make regular contributions every month? You will end up paying the brokerage fees every single time, leading to a large portion of your investments going into the pockets of DBS or whatever brokerage you use.
Thus, it is essential to realize that brokerage fees ARE expensive, and once you have recognized that, you can avoid paying them unnecessarily.
One way you can do so is by simply buying into an Index Fund ETF, such as the SPDR S&P 500(SPY) which tracks the S&P500 Index, or the STI ETF(ES3) that tracks the Straits Times Index.
These Index Funds track the index, which are already diversified and made up of the largest companies in the stock exchange, ensuring that your investments are diversified in strong companies with proven track records.
This way, you only have to pay the brokerage fee once, rather than engaging in portfolio diversification yourself.
Alternatively, if you are looking into consistent investing on a regular basis, you may consider Regular Savings Plans (RSP) offered by platforms such as FSMone or OCBC’s Blue Chip Investment Plan.
These RSPs are often an affordable way to invest consistently, without losing too much money on brokerage fees.
While I hope that these tips will enable you to become a better beginner investor, you will definitely make mistakes along the way. What matters more is that you are able to learn from your experiences and share that with others, so that everyone is able to safely grow their money for the long term.
Do let me know in the comments if you have any opinions or questions!
SPDR SPY500 Price Chart https://finance.yahoo.com/quote/SPY/performance/
Market timing simulator: https://qz.com/487013/this-game-will-show-you-just-how-foolish-it-is-to-sell-stocks-right-now/
Stock Images: https://unsplash.com/photos/OtfnlTw0lH4