But hold your horses, you might say, I hate taking risks. I also don’t want to be like my dad glued to the teletex – I want a life.
We got you fam. In that case, this could be the first – and last – investment strategy you might ever need.
What’s the first thing I should invest in?
There’s a crazy amount of things one can invest in, from property, shares, bonds, gold, oil, watches, etc.
But shares are a great cornerstone for the average investor’s portfolio. They are accessible to the everyman, and it’s possible to start from $50; more attainable than what you’ll need for, say, a property.
But to recap on the basics, buying a share means being a part-owner in an actual company. The value of your shares grow and shrink depending on the value of the company.
You can buy the shares of many companies, just like the makers of the phone you’re reading off now, perhaps made by Apple or a Samsung.
So, owning their shares will allow you to take part in their successes, instantly turning you from consumer to fat cat capitalist. Great!
If you thought about it, others probably did too
But I love Apple products, you might think, looking up from your iPhone X. Everybody does! Look at the queues when a new iPhone drops, it’s a sure win!
So why don’t we all just buy Apple shares?
Well that thought probably crossed the thousands of apple fanboys in the queue. Also, the stock market is an open ocean, and we are swimming in the same place as sharks – from investment bankers in the CBD to Wall Street.
This means that due to demand and faster fingers, Apple’s share’s price could have already been driven up, not leaving headroom for further growth in price and profit. But that’s the least of one’s worries if we are talking about Apple, remember Nokia? Could that happen to Apple in 10 years? No one knows.
So – if you don’t know what you’re doing – you can easily lose money if a company goes down or underperforms.
But, if shares are so risky, why are we even talking about them?
Manage risk with diversification
This is because as a whole, shares have performed well over time. Locally, Singapore’s top 30 listed companies share value has, on average, grown about 7% per year since 2002.
Looking overseas, in the U.S, the top 500 listed companies have averaged 10% in returns over the last 40 years. These results are even after accounting for 2 major global economic crisis in 1997 and 2008.
So the biggest companies – as a collective whole – has consistently beaten inflation handily. This is based on the belief that economies always trend upwards – the human race will keep improving over time.
Well, financially speaking, at least.
And this is reflected in the stock market, 40 years ago, if one bought $100 worth of shares in the top 500 American companies, it would be now worth $4,500.
So diversification is a big thing in investing, don’t put all your eggs into a single basket. So to prevent the risk of picking a wrong share, buy ALL the shares.
You might say, “hey TSS, that’s BS! Even I, investment noob, also know you can’t buy 500 company shares with just $100.”
Own many companies
With just $100 you can buy the shares of the top 30 companies in Singapore.
Even better, with that same amount you can even buy into the performance of over a thousand companies across the world!
This can be done by Exchange Traded Funds (ETFs), which track indexes. Simply put, indexes are rules.
And the ones we touched on earlier actually do exist.
- STI rule: “The top 30 companies in Singapore”
- S&P 500 rule: “The Top 500 companies in the U.S”
- MSCI Core World Index: “A spread of 1,636 companies to represent the economy across the developed world”
So ETFs track these indexes. This means buying a single unit of an ETF exposes you to a broad index of multiple companies.
But not all ETFs are created equal, the ones you should be interested in are the ones outlined – that follow one, or several developed national economies.
Buying ETFs is cost effective
And on the topic of risk of losing capital, what’s another sure way to not lose money?
Well, simply not spending too much of it. And this goes for investing too, when you buy shares you will have to pay middlemen – from the banks, to brokers to fund managers.
And fortunately for us, most ETFs tick the cost-effective box.
This is because ETFs simply “follow-the-index”, so they do not need to be actively managed by a well-paid financial person. This savings on lower operational costs are passed to you, the investor.
To evaluate whether an ETF is cheap, look at the expense ratio of an ETF. These are the fees charged by the ETF fund manager. You can find this in a financial assets fact sheet.
And of course, the cheaper the better. The average ETF expense ratio is 0.44%, so anything lower than that is decent.
When to buy?
As this strategy only cares about the continuous progress of economies in the long term, getting money ASAP into the market for it to grow is key; the more time your money spends in the market, the better.
This makes it suitable for the average salaryman, as we can perhaps only squirrel a few hundred or so dollars aside each month. So invest that spare cash regularly and periodically. Some also prefer to invest quarterly to save on transaction costs, but it’s a preference.
But the better option might be investing with a monthly period, because there are set-and-forget ways to purchase the local STI ETF this way – which we will go through in the next article.
This has an offshoot benefit. Buying periodically helps you avoid the pitfall of timing when to buy a share – which can be just as difficult as stock picking.
The periodic investments mantra primes you to ignore market conditions and just continuously buy into the index, rain or shine. So headlines screaming “Economic Doom” will not panic the periodic investor – and keep you up at night.
Over time, this investing style will keep you buying when the market is cheap (during economic downturns) and also when the market is soaring in the good times. So the price of purchase will be averaged, this is called Dollar Cost Averaging (DCA).
However this is why an emergency fund is so important, tiding you through rough times, so the strategy can keep going, and you can keep purchasing when the market is cheap.
This method is highly suitable for someone who wants a life outside work, and not pour over market data, financial reports and geopolitical news – which by the way – is the responsible way to stock pick.
Downsides & Risks
Sounds good so far right? So what’s the catch? Here are some downsides to this plan.
- You will never beat the market, as indexes follow the market – in fact trail it as you will be incurring transaction costs – so don’t expect to get rich quick off this, it’s a boring style of investing.
- It requires being disciplined and staying the course. Keep buying.
- Some think that passive “zombie” indexing could distort the stock market by artificially inflating the prices of the indexed companies. So, the more popular this strategy becomes, the more this could mean trouble, and passive indexing is rapidly gaining popularity. For example, in the USA, passive investing’s share of the US market has leaped from 15% in 2007 to almost 50% today, so do keep an eye on this issue.
- But also, read a well-researched rebuttal by a highly respected fund manager, Dimensional Fund Advisors, on the topic here.
So now you know all about Index ETFs. But if you’re still not convinced, don’t take our word for it, take Warren Buffet’s, one of the greatest investors that ever lived.
“if you invested in a very low cost index fund – where you don’t put the money in at one time, but average in over 10 years – you’ll do better than 90% of people who start investing at the same time.
“If you like spending 6-8 hours per week working on investments, do it. But If you don’t, then dollar-cost average into index funds. This accomplishes diversification across assets and time, two very important things.”
Well, we hope this was helpful. In our next article we go through the specifics on the nuts and bolts of how to invest with this strategy in Singapore.
Such as picking an ETF, asset diversification, and lastly, perform portfolio balancing, an additional strategy that can maximize your returns.
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