Thursday, September 15, 2016

[Vote for me #3] Investing your money starts with containing your costs

[ I have submitted a personal finance essay and right now, I am still canvassing for votes here. Voting will only end on 16th September. I will be writing  a set of three essays to elaborate on the ideas presented in my essay in the hopes that I can get more hopes and hopefully win something for this competition. This is the third and last essay ]

The last component is investing your money, and I will not go into the territory covered by other bloggers on specifically investing which stock counters, instead I will share general tips which would dramatically improve your investment performance.

a) Investing is about cost control, so you need to get rid of parasites out to suck you dry

If you are focused on investment performance and always trying to guess which sector or industry would outperform the markets, you are already wrong. The performance of global equities over time will always be around 7-8% per annum. For bonds, you might be lucky to get 3-4%.

Face with this reality, the fastest way to outperform is by controlling your costs. If you buy a unit trust or ILP from some financial advisor, you can lose thousands when you hit retirement age because the expense ratios and management fees will cause you to lose 2.5% every year. So your equity returns are more likely to be around 5.5% per year.

The same applies if you invest your own money in the stock market but churn your own account often. The money goes to your stock-broker.

b) Investing is about spreading your risks

Too many investors think that they invest like Warren Buffett. Too many end up investing like Jimmy Buffett. The really good guys who can read financial statements might be able to hold 8-12 stocks and achieve returns of 30% every year, but most of us are average investors.

I think that it is better to assume that you are an average guy.

I hold about 30+ stocks because I really don't want to be affected by the underperformance of one counter. Instead, some of bad performance of my stocks are counteracted by those which outperform, giving me a good night's sleep.

c) ETFs are the best tool to lower costs and spread your risks.

If you agree with my earlier points then an ETF which covers all the stocks like Straits times index is a great way to reduce your costs and spread your risks. For beginners, a simple strategy of holding a stock and bond index is a great way to invest your money without going through the lengths of becoming a stock market expert.

d) If you are stock picker, be principled with your stock picking approach. 

If you fancy yourself as a stock picker, then you will need to be principled in your stock picking approach. You can't really wake up one morning and decide that Sheng Siong is a great stock because your wife shops there everyday ( Even though Sheng Siong is actually a great stock to have over the past year ).

I use a Bloomberg terminal which is free for all SMU students. You can use a terminal for free at the central library but fighting the other uncles for a 1 hour slot can be quite annoying.

I employ a selection criteria like "high dividend yields" and "free cash flow > dividends". Every now and then, Bloomberg gives me a list of stocks which meet my criteria, then I try to check out stocks which have yet to own. I will research and then buy the counter if the dividends I accumulate to spread my portfolio further.

Every now and then I try to run a simulation on how my strategy would perform in the markets over the next 10 years.

This is to convince me that the strategy I employ is not a bad joke.

e) I do have money set aside for high-risk investments

As I am a financial blogger, maintaining a degree of thought leadership matters to me, so I dabble in crowdfunding websites and mine cryptocurrencies in a datacenter in Iceland.

These initiatives rarely make me any substantial amount of money but reading up aggressively on these new ideas keeps me updated on technology trends and adds an X factor to my class presentations.

The combined effects of my investment portfolio and high risk initiatives is that I have very little money on me at all times after setting aside family expenses.

How little liquidity I have is often affected by rights issues from my REITs investments.


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