3 Simple Investing Tips for Beginners
The Straits Times Index (SGX: ^STI) gained 18.1% in 2017 while the S&P 500 soared 21%. There is no question that investing in stocks is one of the smartest ways to make your money grow.
And here’s the thing: you don’t have to be an expert on finance or economics to start investing. This being said, learning about investing can still be daunting if you’re completely new. But fret not! Here are three sensible tips to consider for beginners:
1. Portfolio allocation
A common rule of thumb for portfolio allocation is to deduct your age from 100 and put the corresponding amount in equities. So, if you are 30, then you should put 70% of your portfolio in stocks, and the remaining 30% in bonds.
As a beginner, it is unlikely that you will be able to purchase corporate bonds as they have a minimum investment lot-size of S$250,000. There are retail bonds with a minimum investment lot size of S$1,000 and above, but these may have lower credit ratings and thus higher risk. One option to get exposure to bonds would be through bond-focused unit trusts or ETFs.
The adage “don’t put all your eggs in one basket” is important. Again, as a beginner, it is likely you do not have a lot of money to invest with. This is why you should not look at investing in the shares of only a small handful of companies.
Instead, you can start with low-cost unit trusts or exchange-traded funds that are diversified across a wide basket of stocks. There are around 80 exchange-traded funds in Singapore, many of which focus on stocks.
One important thing to keep in mind when buying unit trusts (unit trusts are known as mutual funds in the US) and exchange-traded funds that are listed overseas is the expenses involved. These expenses can include brokerage fees, custodian fees, and sales and management fees. Try and keep these costs as low as possible.
3. Invest regularly
You can either invest in one lump sum, or spread your investments over time; in finance speak, the latter method is known as dollar-cost averaging. If you have S$100,000 you would like to invest, lump sum investing would mean investing the entire amount at one go. Dollar cost averaging, on the other hand, would mean spreading out your investment, say investing S$25,000 every three months.
One advantage of dollar cost averaging is that it will enforce a discipline in you when looking at the markets and your holdings regularly. This helps you review your success and mistakes.
I love the Malay saying “Sedikit sedikit lama-lama jadi bukit.” It is literally translated as “piling up a little something over time can eventually result in a hill.” The phrase lends itself to many things in life. As a beginner, you should keep a look out for all the small expenses that can eat up your profits. Building a big nest egg also means we have to start right now, even if we are starting small.