If you want to grow your money, it is important to do more than just earning it. More importantly, you need to keep the money that you have earned as well as grow it. In order to grow it, the key is to learn how to invest your money.
When you become an investor, you will likely use your money to invest in on or more of the following channels to gain profitable returns:
- Stocks and bonds that pay out dividends
- Interests and dividends from savings
- Returns from businesses
- Real estate trading
- Value appreciation from stocks, real estate or other assets
With the advancement of technology, it has become possible to invest with just a few bucks using your smartphone. In this article, we will help you learn the basics of investment and guide you in decision making in order to grow you money exponentially.
Investing makes your money grow exponentially over time due to the compound interest. Compound interest means interest calculated not only on the original investments, but also on any interests, dividends and capital gains that accumulate so your money keeps growing exponentially over time.
Imagine you are a 16 years old teenager who got a small inheritance of $5,000 and decided to invest that money in an investment account with an interest rate of 7 percent and you contribute $200 per month to the account, you will approximately have $264,000 after 30 years.
This is a simple example used to illustrate how powerful compound interest is if everything goes right.
When should you invest?
Investing may sounds intimidating especially if you have never done any sort of investment before. All investments come with risks, however, there’s also a potential for serious gain. Doing anything for the first time can always be horrifying as if you are stepping into an unfamiliar territory. This is especially true if it involves investing with your hard-earned money for the first time. In this article, we will be sharing what the do’s and don’t’s are for beginners in investment.
Investing for the first time
When it comes to investing, there are a few types of people around.
- The Doomsday Preppers – people who keep all their money in gold and real estate
- The Gambling Day-Traders – people who play with stocks and keep tracking changes in the stock market
- The Indexers – people who invest in everything and hope to receive gains from the slow overall increase of the markets
If you are one or more of the above categories, this article may not be for you. However, if you are open-minded and keen to learn about the basics of investment, please read on.
Risk vs reward
It is true that there are risks when it comes to investments. Although it is impossible to eliminate the risks totally, it is possible to reduce the risks by investing wisely.
It is recommended to start investing since young and the great thing about it is that you are probably investing in long-term investments like your retirement account which are less risky. It is better to invest in such accounts than playing with stocks which are more risky and it is even worse if you do not understand what you are investing in.
Although investing is risky, not doing any sort of investment can cost you a lot more than losing a bit of money on a bad investment.
As mentioned above, to take advantage of compound interest, the number one rule is that the sooner you start to invest, the more money you will earn over time. You can have a look at our article about the compound interest highlighting the big differences between someone who started investing at the age of 25 and the other one at the age of 35. You could be missing out on accumulating your wealth if you start investing later.
What do you invest in?
The key point to note is to keep investing as simple as possible. To become a successful investor, the most important factor is not the stocks or funds you choose but, it depends on how you allocate your money into bonds, stocks and the cash you hold in your portfolio.
Let’s have a look at different kinds of investments available in Singapore.
A mutual fund is normally managed by fund managers and, it is a type of investment that pools your money with many other investors to purchase securities for the group.
For beginners, it is recommended to start from investing in mutual funds or exchange-trade funds rather than stocks and bonds. By doing so, you will be able to invest in a wide range of portfolio of stocks and bonds in one transaction rather than trading them all yourself.
Not only they are safer as they are diversified, it is also far less expensive to invest this way. Moreover, you will only be required to pay one trading commission or even nothing at all if you buy a mutual fund directly from the fund company. If you were to buy different kinds of stocks, you would need to pay more than one trading commission.
Bonds are debt obligations issued by companies or organisations to investors. When you invest in a bond, you own the debt of a bond issuer. You(investor) will receive regular payments from a bond issuer until the maturity of the bond where the issuer is legally required to return the principal.
There are several reasons why people choose to buy bonds:
- Investors receive payments regardless of the financial performance of the company.
- Your capital is preserved even during downturns as your principal and interest payments are guaranteed.
- Investors know when, and for how long their interest payments will be made, and when their principal will be returned.
- In the event of a company’s financial difficulties, investors have superior legal claims to the company’s assets.
- Bonds are less volatile compared to stocks
Exchange Traded Funds (ETF)
Exchange Traded Funds (ETF) are investment funds that are traded on stock exchanges and offer diversified exposure. Similar to trading stocks, you may trade your ETFs through your stock broker or use your own online trading account.
There are several ETFs available to choose from and, when you purchase an ETF which tracks a stock index, you can gain an exposure to the performance of the index.
There are a few reasons why people invest in ETFs:
- You can gain an exposure to the performance of the index without the need to invest in all its component stocks
- ETFs have lower management fees. Therefore, fees and charges are normally lower than for actively managed investment funds. In addition, there is usually no sales charge. However, if you trade ETFs on SGX, additional brokerage commissions may apply.
- Due to ETFs being traded on a stock exchange, you can buy and sell them throughout the trading day.
If you are brave enough to play around with the stock market, we suggest you to take a slow and steady approach, and not invest more than 10 percent of your portfolio in individual stocks until you are confident of what you are doing.
For beginners, it is recommended to read about value investing, where heavy amounts of research and a “buy-and-hold” mentality are focused.
Should you DIY or get a financial consultant?
If you have quite a lot of money to invest, and you are looking for professional financial advice, it’s best to look for a financial consultant who will be much be much capable of explaining to you face-to-face than any electronic form of consultant.
Some people prefer to invest with a financial consultant because they want face-to-face interactions and professional advice. Most of the time, those will a huge amount of money to invest will approach a financial consultant to do the work such that they don’t have to do all the hard work.