A Beginner's 4 Step Checklist Before Starting Your First Investment In Singapore
“How Do I Know When I Am Ready To Invest?”
This is a very common question which most working adults face today. Especially once you have a few thousands in your bank account and start realising that maybe you should be doing something about it.
Let’s get these common excuses out of the way:
- It is too complicated (I didn’t study investing or finance in school)
- I don’t know how to ‘Trade or buy stocks’ too technical
- I don’t want to lose any money because it is too risky
- It is too far away and only for my later phase in life when i am planning for retirement age
So, is there a really simple checklist that we could design after having met so many people in our community who got past these early phases of their investing life?
TL;DR: Answer these 4 questions before you start investing
However, here is a simple 4 step checklist which we believe all who are getting started should follow:
- Have NO or manageable debt
- Have rainy day funds (6 months of monthly committed expenses)
- Understand basics in investing (and discover various asset classes)
- Willing to grow your investment for the long term (5 to 10 years)
Here’s the full podcast if you’re interested.
Q1: Do You Currently Have NO or Manageable debt?
This is a very important question to answer.
Simply if you are in debt, you are trying to fight a losing battle where you are paying off a loan at an interest rate which may be rendered redundant if you are trying to invest also.
Here is a simple illustration:
You are in a student loan debt of $15,000 with an interest of 3% p.a. Instead of trying to allocate more funds to pay off the debt, you are trying to invest that additional funds into an ETF that yields 3 to 5% p.a.
Therefore, your overall investment gain is close to 0%… hence you are effectively wasting the costs incurred and time to go back to square one where instead you should fight the negative yield (in this case, clearing your interest on your loan first).
This is actually a pretty common situation we observe with individuals with student loans. My answer would be to focus on clearing that down first before moving to the next step of building up your savings reserve.
The idea of manageable debt is one where you have a Home loan and you can actually predict the interest rate (eg 1.5 to 2%) or using your CPF every month. Then you can actually look to build wealth at a yield above that interest rate.
A big red flag is credit card debt. Never get into such deep waters, because these compound at over 28% p.a interest and you can get neck deep really quick.
Q2: Do You Have Your Rainy Day (Emergency Funds)?
As a rule of thumb, you need at least 6 months of monthly committed expenses locked down for emergency purposes.
Often, people assume that investing is for the short term. Research has proven that if you are in it for the quick-gains, it is likely you will falter and fall short. The long-term passive investors likely are the ones who will ride out the bull and bear markets.
Hence, it would be essential to have at least 6 months of monthly expenses, just in case in a bear market, where you get retrenched or lose your source of income, you are not forced to sell all your investments in a loss position or worse, take up additional loans to get back to square one again.
An example of monthly committed expenses would include things like insurance premiums, food, water, utilities and rent. Basically things which rank very critically a on the Maslow’s hierarchy of needs. (Safety and Physiological)
Q3: Do You Understand The Basics To Investing And Asset Classes?
We believe in the saying that knowledge is power, and to take calculated risks. Investing always has some form of risks associated to it.
It is very crucial to not follow the herd-mentality in investing. Often the big losers are the one who follows a friend’s recommendation or stock tip but ends up getting burnt. (personal experience here from my earlier days in NS) What is important is to consider is your risk appetite and why are you actually investing for. Is it for long-term retirement, to beat inflation etc?
That also means that you should have a basic understanding the various asset classes, from bonds to stocks to ETFs and Unit Trusts.
You can understand this simple investment products at a glance for noobs and beginners. Remember, higher potential return always comes with higher risk.
How Much Investible Funds Are Enough?
We advocate setting aside a comfortable amount (anywhere between 15 to 30% if you need a hard number to gauge) of your monthly income for passive investing.
In that same idea, it is likened to the concept of paying yourself first and having a job for every dollar. Only set aside investing funds which you do not need for the short term.
What Strategy Is Recommended for Beginner Investors?
Most investors would have heard of this famous phrase:
“Time in market is better than timing the market”
Therefore, a common strategy which most adopt is the idea of Dollar Cost Averaging. Where it basically means buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.
From the above, it is observed that the investor purchases more shares when prices are low and fewer shares when prices are high.
A common adaption of this simple idea of investing is in the idea of contributing monthly to your investment product, which we recently released a piece methods to invest monthly.
Q4: Are You Willing To Grow Your Investments For The Long Term?
One of the common reasons that people have to invest is that they want to make a quick buck on their investment return.
However, that mindset can be potentially dangerous because you may enter and exit the market at a wrong timing.
A better way to think of investing is that you want to grow your money over a period of 5 to 10 years or even more, to beat the core inflation of 1.9% per year.
A classic example is if you look at market indexes (eg the Straits Times Index (STI) or the S&P500 index which tracks the US top 500 companies) you will see that over a period of 30 to 50 years, it has shown resilience as economies in general grow over time.
Bonus Question: Is Investing More Important Than Saving?
It can be very confusing when people talk about savings and investing. People often mix them up and many financial services companies add to the confusion selling products with both components mixed in together.
Both Savings And Investing Are Important For Different Reasons
It’s like deciding to eat an apple or an orange. There are pros and cons of each and both serve different purposes
- Savings is the idea of storing a bulk of cash for rainy days or when opportunities come for you to dive in
- It gives you a cushion for unplanned expenses or potentially planning for big expenses such as kids, starting a family etc.
- Investing is the idea of deploying your capital into the market and letting your money work for you
- When done correctly you will be able to beat inflation and potentially drive passive income (Returns = Capital gain + Dividend yield)
|Goals||Short Term||Long Term|
|Cash funds for unplanned |
or planned expenses
|Beat inflation and
grow your passive income
|Pros||Liquidity for |
|Beat 2-3% per year
|Freedom of choice |
|Can be easy if you do
|Cons||Lose out to |
|More returns most likely
comes with more risk
|Savings account |
will not grow
|Best for long term|
|-||Less liquidity for
urgent uses in short term
|Types||Savings account |
with any local bank
|Passive investing tools
|Under your pillow |
(in your Safe etc.)
|Exchange Traded Funds
|-||Blue chip stocks,
Funds, Unit Trusts
Conclusion: Save First, Invest When You Are Ready
You have to understand your current life stage to properly determine if you are ready. Also, do be very wary of agents and financial planners who try to sell you a mix of savings and investing products if you plan to Do It Yourself!
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