Financial Chickens

Investing in the stock market has proven to be one of the most reliable generators of wealth over the long run.

Here are some interesting stats that highlight the returns over the last decade up till 30 September 2019. The data is sourced from JP Morgan’s Market Insights.

That being said, investing in the stock market can be daunting. The article is aimed at providing a step-by-step guide to investing in the stock market the right way.

Investing in Stocks 101

Stock are part-ownerships of businesses. You can think of an entire business as a pizza. If you divide the pizza into slices, each slice of the pizza essentially represents a share of the company!

The general goal is to form a portfolio of strong growing companies so that you can benefit from their upward growth trajectory. When companies do well, their earn more money that allows them to pay more dividends to you at shareholders.

Companies that are able to demonstrate quality growth and growing dividends normally also benefit from an increased in share price over the long run.

It’s important to note that while the overall returns of stock markets are overwhelming positive in the long run, they tend to be volatile in the short run.

1. Determine what kind of investor you are

Generally, there are two different ways to invest in the stock market.

1. DIY Investor – You generally prefer a much more hands-on approach in picking stocks and equity funds.
2. Outsourcing to Professionals – You believe that stocks are great long term investments… but prefer someone else to manage the process

Creating a portfolio of individual stocks is a much more active approach as you will need to do your research and due diligence and the business performance. This is commonly known as fundamental analysis.

If that is your interest, it can be great fun as you learn about new businesses and trends. Learning how to invest this way also makes you a better investor even if you decide to delegate this work to a professional.

If you choose to delegate your investments to a professional, there are two ways to do so.

Firstly, you can choose to invest in a low-cost index fund or ETF that will simply track a specific index.

For example, the Straits Times ETF will track the Straits Times Index (STI) which includes some of the well-known blue-chip companies like UOB, OCBC, DBS and Singtel.

Another way to invest is to invest in actively managed funds that generally aim to beat a particular benchmark.

2. Decide your portfolio allocation to the stocks

As a general rule of thumb, you should not be investing money that you will need in the 12 months.

While long term returns are overwhelmingly positive, short-term returns are often volatile.

Trying to predict prices in the short run is often detrimental to your overall performance and there is plenty of evidence to show that investors are terrible at market timing.

You should make sure that you have the following settled before deciding to invest in stocks:

1. An emergency fund (typically 3 – 6 months of savings)
2. Enough money to pay off your borrowings (credit card bills, mortgages)

Asset Allocation – How Much to Stocks?

So, once you’ve decided how much of your portfolio you want to direct to investments, you have to decide how you want to allocate it to different assets.

Typically, most portfolios will consist of:

1. Cash
2. Stocks / Stock Funds
3. Bonds
4.  Investment Property

Each asset class has its own characteristic and return drivers and how much you decide to allocate to each will be determined by your risk tolerance and investment objectives.

Your tolerance to volatility will be quite a big determinant in what your allocation to the stock market is. As mentioned earlier, stock prices jump all over the place in any given 12 months.

Some people are comfortable with that, some aren’t.

What matters is that you find out what you are comfortable with decide on an allocation that allows you to sleep easily at night.

Your age is also going to be another big factor in determining your asset allocation. For example, a young individual who is in the process of accumulating wealth and who will not need the money any time soon can afford to think in terms of decades.

On the other hand, a retiree who needs to draw down on his investment portfolio in the next 2 years should have a much lower allocation to stocks.

You can check out our article on asset allocation where we talk about this further: Beginner’s Guide to Asset Allocation 

3. Open a brokerage account

 To invest in stocks, you need to have a brokerage account.

There are plenty of different companies that you can open with such as UOB-Kay Hian, DBS and Saxo-Bank.

One big advantage that investors have today is that trading costs have dramatically in the last few years.

In the US, many online stockbrokers have even eliminated trading commissions completely!

While this is not the case for Singapore yet, trading commissions have dropped dramatically.

The main differentiator between brokerages will be their educational tools, research platforms and trading platforms.

Different platforms have different strengths and weaknesses and you should do research to find out which broker is best for your needs.

You can check out our article on picking a brokerage here:

Beginner’s Guide to Picking a Brokerage [Coming Soon]

4. Get Started in Closing Your Knowledge Gap

At The Asia Report, we are a pick believer of empowering investors to make better investment decisions through financial education. In general, there are several concepts that matter the most when it comes to assembling your portfolio and that include:

1. Diversification
2. Invest only in companies that you understand well (i.e. your Circle of Competence)
3. Learn the basics of financial ratio analysis in order to evaluate stocks

At The Asia Report, we believe the quickest way to gain competence and mastery of any new skill is to study what highly successful people have done and work backwards.

Investing is a skill like any other. We are big followers of value investing which is an investment framework that was conceived by Benjamin Graham.

While you may not be familiar with Benjamin Graham, you probably are familiar with his most famous student – Warren Buffett.  

We’ve put together a short course on the core investing principles of value investing that you can watch to jump-start your investment journey.

These investing principles form the bedrock of what we do in our own daily work as full-time investors. They are also the same investing principles that many other successful investors use.