Step 2: Financial Planning (Investment) and Painful Lessons
Not too long ago, I reviewed my family’s insurance policies and financial investments, and I have some thoughts to share — from the insurance audit in the previous post to painful investing lessons in this post. This is part of a series about planning for the future and its unpredictable life events, and financial planning is my first step. The following steps plan for different future scenarios:
I invite you to join me in planning for the future, as we break the giant plan into bite-sized steps and take one small step at a time together.
Jump to the related posts:
- Step 1: Financial Planning (Insurance)
- Step 2: Financial Planning (Investment)
- Step 3: Advance Care Planning, Advance Medical Directive and Lasting Power of Attorney
- Step 4: Legacy and Estate Planning (such as writing a will and funeral wishes)
Jump to the relevant section:
Before Investing
One of my regrets is not investing more consistently earlier in life. As the popular saying goes, time in the market beats timing the market. However, before you start investing, consider these few things first.
Debts
First, pay off high-interest debts, such as credit cards or double-digit interest-rate loans. Prioritise paying off your debts from the highest interest rate to the lowest.
Budget
After paying off these debts, create a realistic budget so it’s more sustainable and easier to stick to. There’s a popular 50-30-20 rule for your take-home pay — 50% goes to needs, 30% goes to wants, and 20% goes to your future (savings, insurance and investing). To beat inflation and achieve financial freedom sooner, allocate more to the future, such as 30%, and then 20% to the present wants.
Savings
From the amount budgeted for your future self, create an emergency fund and retirement/pension savings. For the latter, CPF in Singapore has taken care of its basics. An emergency fund is used for unexpected financial expenses such as job loss, medical emergencies, and home repairs. With this fund, you can also quit your job to pursue opportunities that cannot give you a regular income at the start. How much to save for this fund depends on your job security and other factors, such as whether you are the sole breadwinner. The amount increases with uncertainty and/or if you have many dependents.
Generally, an emergency fund is about three to six months’ worth of expenses held in a high-yield savings account. If you cannot make this happen at once, don’t worry. Start small and build this fund over time. Saving a small amount each month can help you reach your goal amount eventually. This is also more realistic and sustainable than trying to save a large sum all at once. CPF has a good article, “5 tips on building an emergency fund for rainy days“.
Insurance
Buy insurance to cover unexpected financial expenses in future, such as large hospital bills. Protect your wealth first with insurance, before you try to grow it. There is no point in growing your wealth and losing it in the end.
I’ve written about this in my previous post, “Step 1: Financial Planning (Insurance)“.
Start Investing
After you save as above and buy the necessary insurance, you can now consider investing your remaining funds. You can get started with just a small amount of money – let your money work and snowball.
Basics
To minimise “school fees”, aka losses made in the financial market, it’s good to do some research. Research will minimise your loss, but not necessarily eradicate it.
First, understand the basics of investing. There are finance blogs and books to start, here are a few easy reads I have read and recommend: “The Psychology of Money“, “Take Back Control Of Your Money” (in SG context), and “Girls Just Wanna Have Funds“.
Then, understand the various financial instruments, such as stocks, bonds, mutual funds, ETFs, cryptocurrencies, art and collectable items, commodities, and even property. Read about those you are interested in — how each of them works and the costs, risks and rewards associated with each one.
Even for stocks alone, there are different kinds you can invest in: growth versus value stocks, penny versus blue chip stocks. You can earn from capital gain or through dividends. Stocks can also be categorised by small-cap, mid-cap, and large-cap stocks — the bigger the cap, the bigger the company.
Risk Appetite and Time Horizon
Decide on your risk appetite and time horizon.
This will help you decide on your investment strategy, such as whether a higher percentage of the investable amount is allocated to higher- or lower-risk investments. For example, people with a higher risk appetite and a longer time horizon can put more of their money in stocks that are riskier than bonds. In any case, diversification is key.
Is your risk appetite conservative, aggressive, or somewhere in between?
Generally, the higher your monthly income and savings or the fewer dependents you have, the more risk you can afford.
What is your investment time horizon?
It is the time you are expected to hold the investment. In other words, the duration you can leave the money in the investment without withdrawing. It is never too late to invest, but if you need the money within five years, which is considered a short-term timeframe, you might want to take on less risk.
You can take on more risk with a longer time horizon because, based on history, even though stock markets might experience high volatility in the short run, markets always bounce back in the long run.
Research
Trading Platforms
There are many trading platforms nowadays, and you can find online reviews about them on blogs, Reddit, and other forums. I tried a few because of the sign-up bonuses, and my preferences are based on the UI and cost. Note that even though some platforms offer zero commission, they might cost you more with a bigger forex spread on currency conversion. And if you want to buy stocks and hold, some platforms charge you custody fees for inactivity.
Remember to do your due diligence before signing up for any trading platforms. Sign up with my referral link/code to get sign-up bonuses: home.joogostyle.com/referral-codes-invest/#brokerages
Industry and Companies
Do your homework. Like entrepreneurs, only invest in businesses you understand or an industry you really believe will grow. The point is to avoid trading based on rumours, hype or gut feelings. Be critical of the advice of anyone who tries to convince you to buy a specific stock or crypto, regardless of family, friends or influencers.
However, don’t put off investing just because you think you have to scour through tons of financial statements and annual reports. You can start small in your research on companies and industries you want to invest in. Find out what they do, the general trends and basic ratios, such as P/E ratios, or key figures to look out for.
Investment Advice
Diversification
A common investment advice is to diversify your portfolio. We don’t have crystal balls, so even the most savvy investor would have bought stocks that went into the red. Diversification thus reduces the impact of a single under-performing stock on the overall portfolio performance.
As a starting point, a well-diversified portfolio includes at least 10 to 20 different stocks. Diversify within stocks and funds and invest across continents and industries so that negative events in one area don’t significantly impact your entire portfolio.
Another strategy is to diversify with a core-satellite portfolio. Construct the “core” of your portfolio with long-term and low-risk investments (such as indexes like the S&P 500, where you buy and hold). Then, the “satellite” comprises riskier investments, such as commodities and individual stocks or ETFs of trending sectors, like Artificial Intelligence. These could outperform the broader market and give you better-than-average returns. As a general guide, 80% of your portfolio can form the core, while 20% is the “satellites”. You can read up more about the core-satellite portfolio in this DBS article.
Time and Patience
Time and patience are required to build wealth for long-term financial goals, such as retirement.
You might have heard of the power of compounding interest. This is the interest you earned on the interest you earned from your investment. Hence, the earlier you start investing, the longer your investments will be able to compound, resulting in greater returns.
I found an interesting calculation in the article by moneysense.gov.sg on the Effects of Compounding Interest: “The Rule of 72 helps you estimate how long it will take to double an investment at a given rate. For example, if the interest rate is 4% p.a., 72/4 = 18 years. It will take 18 years to double the money under a 4% interest rate.
In other words, if you buy and hold your investments for years, your returns will compound and increase exponentially. However, it’s easier said than done. Many find it difficult to sit tight and leave investments alone, especially during a bear market when it is all red.
One investment strategy to utilise the power of compounding interest and reduce market risk is dollar cost averaging (“DCA”). DCA means regularly investing a fixed amount of money into an investment at a fixed interval, let’s say every 7th of the month, regardless of the prices at purchase. Setting up auto-invest can help you have the investment discipline to make consistent investments without being swayed by emotions.
Psychology of Money
This phrase by Warren Buffett is widely quoted: “Buy when everyone is selling and sell when everyone is buying“, and is based on the concept of contrarian investing. Again, this is easier said than done. Because it meant you ought to keep a clear mind and be rational in your investment decisions in stressful situations when your portfolio is bleeding badly and people around you are losing their heads. More likely than not, we get emotional about the money we worked hard to earn and make irrational decisions. Read The Psychology of Money.
Being rational means resisting the urge to sell in a panic and not rushing in to buy stocks during a bull market. After investing for a while now, I KNOW that the market goes up and down. But I still can’t help but FEEL that the momentum for an upward or downward price trend is unstoppable when, in fact, the market can turn directions at any time.
One way to circumvent your feelings is to decide ahead, based on your research, the prices you are going to sell (or buy) at. Some people use stop-loss to limit their losses — set the trigger point to sell the investment when it drops to a certain price point, or drops by a certain percentage. This can help you avoid the need to constantly monitor your investments and let your feelings intervene. Another situation is when the investment is taking up too much of your portfolio or is overpriced.
Painful Lessons
It’s common to hear people saying you would have to pay “school fees” to learn investing along the way. I thought I would be immune to these mistakes because I read and research quite a bit before jumping into investing, but alas, it’s a necessary fee to pay. Here are 5 painful lessons I have learned:
- Start Investing Earlier
- Review Investment Portfolio Regularly
- Look Out for Hidden Costs
- Invest in What I Know
- Be More Patient and Less Emotional
Perhaps one day, I will elaborate more on these lessons I learned from the financial markets.
Lastly, I leave you with this, a reminder for myself too, so that I don’t beat myself over regrets: We can try to maximise returns and minimise losses, but at the end of the day, no one has the crystal ball to buy exactly at the lowest point and sell at the highest point.
Do you have any other questions or good financial tips? Share in the comments section below. 🙂 Read the disclaimer and disclosure at the end of the post before you go. For useful content like this article, visit joogostyle.com for travel, home, and baby matters.
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