Thinking of Investing in Stocks? You Should Consider Doing These First...

Over the long-term, the US stock market has returned around 9% per annum. 

That return is great, considering banks are cutting interest rates and the average inflation rate in Singapore is around 2% per annum.

The higher returns from the stock market may sound appealing…

But…

Before you get all too excited and jump into the stock market right away, you should consider whether you have done the following…

1. Have You Paid Off All Your High-Interest Debt Yet?

The outstanding amounts on credit cards attract a high interest of around 24% per year. And over time, if you don’t clear that debt, those loans will snowball due to the compounding effect. 

With the stock market on average returning about 9% per year over the long run, it makes financial sense to pay off any loans with interest rates above what the stock market can potentially give. 

By choosing to invest in stocks instead of paying off our high-interest debt first, we are actually “losing money” due to the difference between the interest we have to pay on loans and the investment returns we get from stocks. 

On how exactly to clear your debt, here are two suggested ways:

2. Do You Have Enough Insurance Coverage?

Life is unpredictable.

Unless we are self-insured and have millions of dollars coming in each year to pay for any life-threatening events, we should always get insurance to “ringfence” our financial well-being.

Insurance gives us protection against a range of life-altering events, including hospitalisation and critical illness. We should always consult our trusted financial advisors to ensure we have adequate insurance coverage at all times throughout our various life stages. 

If we were to invest without having enough insurance protection, we could be forced to liquidate our investments to pay off any hospital bills, for example, if anything unexpected happens to us. That would undoubtedly delay our financial goals. 

For those who are in high-interest debt and would like to get basic insurance coverage to get immediate protection, you can consider doing steps 1 and 2 simultaneously if you can afford to. As always, please consult your financial adviser to advise you based on your personal circumstances.

3. Have You Saved At Least Three To Six Months Of Your Monthly Expenses?

As a rule of thumb, we should have an emergency fund of three to six months of our monthly expenses set aside. This fund would come in handy during unforeseen circumstances such as a job loss. Why three to six months, you may ask. That’s the average time for someone to gain employment again after getting laid off. 

Having said that, there’s no hard-and-fast rule on the exact amount of money you should set aside. If you are a freelancer, you might want to set aside a larger amount as compared to a full-time employee. It all depends on your comfort level.

Another point to note is that you wouldn’t want to have too much stashed away into your emergency fund as the “extra” money can be put to better use getting higher returns than a savings account or low-risk bond investment such as the Singapore Savings Bond.

Without such an emergency fund, we could, once again, be forced to sell our stock investments prematurely, when instead, those stocks could go on to become multi-baggers in the future.

Lastly…

Once we have settled the basics above, we can consider investing in the stock market after gaining the relevant knowledge.

We should read books as widely as possible, on top of SeedlyReads’ investment content, and learn as much we can from various sources.

Eh, wait…

One last thing to remember.

The stock market is not a place for money that you need in the next five years.

While the stock market will almost certainly rise over the long-term, there’s simply too much uncertainty and volatility in stocks in the short-term. 

In fact, a drop of 10% or more in any given year would be considered to be the norm. To help ensure we do not get emotional when our stocks turn negative, we should only invest cash that we don’t need for at least the next five years.

If you need to save for short-term financial goals such as a wedding or home renovation, it’s better to put your money in low-risk instruments such as a savings account.

Have Burning Questions Surrounding The Stock Market?

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