By FARHAN SHAH
Seen on AUGUST MAN MAGAZINE OCTOBER 2015
THE WAY THE FINANCIAL MARKET behaves is like an illogical and untamed beast. It scares many people into a state of financial inertia, content to plod along in their jobs. Although there's nothing wrong with advancing your career and consequently, improving your financial standing, you're sacrificing a huge opportunity to make your money work hard for you while you're working hard for more money.
In the short run, the stock exchange does zig ang zag in unpredictable directions. However, in the long term, the stock market has an average historical rate of return of 10 per cent a year, compounded. If you had invested just $1,000 in Dow Jones in 1900, you would have close to $20 million at the end of 1999, without lifting a singer finger. Kelvin Teo explains how you should start.
What should I prepare before I begin investing?
Before investing, you should have enough cash to maintain your lifestyle with the assumption that you could be jobless for six months. I also recommend reading two books: The Intelligent Investor by Benjamin Graham, which has been described by Warren Buffet as the best book on investing ever written, and Fooled by Randomness by Nassim Nicholas Taleb, which describes the indiscernible differences between luck and skill.
I have the emergency fund. I've read the two books. I'm ready to start. What do I need to keep in mind?
You should accept three things. One, losses are going to happen, but you will learn and get better. Think of the losses as school fees. Two, if you prefer to entrust others with your money, you can pay fund managers but your cash will be locked up for a considerable period of time. Three, you must be able to accept lower returns on your investments. My first rule of investing is to preserve capital, not make a fortune. For every dollar of loss, your remaining $9 has to generate more than 10 per cent returns just to achieve status quo. Therefore, I am content with a steady inflation-beating return of five per cent, if I can spend less time on research.
Is there a good time to enter the markets?
Of course. I prefer to enter the market when everyone else is getting out – the principle of buying low and selling high. Having said that, it is difficult to outsmart the market and make huge returns. While the playing field is more level now, institutional investors will always have the upper hand because of their scale and expertise. However the worst is for you to be stuck in analysis paralysis and end up doing nothing. If in doubt, pick any option, invest small and observe. Wrong action is better than no action. At least you will learn something.
Right. So what should I invest in then?
It depends on your personal objectives. If you have limited savings and frequent cash needs, I recommend a diversified portfolio that is shorter in term and medium in returns. This allows you to cash out should you ever need the money. A mixture of 50 per cent stocks (diversified across blue chip and growth options), 30 per cent alternative instruments and 20 per cent bond funds is a good start. Stocks and bond funds are good long-term investment, with ample learning opportunities for the former and safer returns for the latter. Alternative instruments are short-term investment that can give higher returns but involves greater risk.