Wednesday, September 2, 2015

Useful Tips for New Investors (Guest Post)

Investing is a simple or complicated as you want to make it. Sure, you can go off the deep end and start arguing about Chaikin money flows, DeMark sequential indicators, the performance of quant funds, etc. But you don’t need to. Even if you’re not an expert, a grasp of the basics can still build that retirement fund:

1. Don’t Start Investing Without Goals

Wanting to “make more money” is not a goal. Wanting something specific, like receiving dividend payouts of $1,200 a month by the time you are 62 years old, is a goal. 

These goals are your financial road map. They tell you whether you are on track, how to re-balance your portfolio if you are not, and what sort of risks you can take. People who invest without goals will get random results, and tend to lose more than they make in the long run.

If you are not confident of planning your financial goals, speak to a wealth manager or financial advisor. 

2. Don’t Try to Time the Market

For most new investors, timing the market (trying to buy low and sell high) is inadvisable. It is not easy to identify when the market has bottomed out, and when it is at a peak. Remember that each successful trade requires two correct decisions: you must not only buy at the right time, but also sell at the right time. It is like a coin toss game, in which you need two consecutively correct guesses for each win.

You are better off looking at long term, passive investments. Think blue chip stocks or Exchange Traded Funds (ETFs). Buy them, reinvest the dividends, and hold for 10 to 15 years. This is also much less stressful, as you will not need to worry about fluctuating stock prices all the time.

3. Buy the Whole Market

If you are unfamiliar with reading annual reports, understanding D/E and P/E ratios, etc. then avoid picking your own assets. Consider buying an index fund (e.g. ST Index fund). This will automatically diversify your investments for you, across different companies listed on the exchange. The returns of an index fund will closely mimic the index (with some variation due to fees and tracking error), and there is no need to make difficult trading decisions.

4. When Buying Funds, Watch for Fees

Funds have a fee, often expressed as the Total Expense Ratio (TER). This is the amount taken from your returns to pay the fund managers, pay its office staff, cover the marketing of the fund, etc.

The TER eats into your returns. So if the fund provides returns of 7%, but has a TER of 2.5%, you are only really getting returns of 4.5%. 

In general, actively managed funds will have TERs of around 2 - 3%. An index fund (see point 3) has a much lower TER, often 0.5% or under. This is one reason ETFs often generate higher returns than mutual funds: 

If a mutual fund with a 2% TER generates a 5% return, you would only really be getting 3% returns. But if an ETF generates the same 5% return, and has fees of just 0.5%, your return would be 4.5%. 

5. Follow Your System

There will be days when your investments take a beating, or when the news is broadcasting a financial meltdown. You might feel a strong need to “cut and run” when this happens. However, this is potentially the worst thing you could do: if you sell when prices drop, you would be buying high and selling low. That’s the opposite of a profit making decision.

Instead, you should remember you’re in this for the long haul. Over 10 or 15 years, irregularities in the stock market tend to get ironed out. You need to shut out the noise, and at most talk to an advisor about rebalancing your portfolio a little. Never start selling in a panic, just as you would not rush to buy on impulse. 

6. Don’t Invest with Borrowed Money

Institutions do this all the time, but individuals shouldn’t. If you engage in margin trading, or seek any form of leverage, remember that it amplifies gains as well as losses. And one of the silliest things you can do is take out a loan to invest the money: it is improbable that you can out-invest the 6-8% interest on a loan. Even if you did, your returns are 6 - 8% lower because you need to pay back the loan anyway! 

If you really want to maximise your options with personal loans, keep it toward debt consolidation, or dealing with crises.

This article is contributed by Allyson of SingSaver.com.sg

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