Let’s start with this question: What is investing?
At its simplest, it’s the act of putting money in something with the intent of it yielding a profit later.
The famous investor Warren Buffet also calls it “the process of laying out money now to receive more money in the future.” In other words, it’s about growing wealth.
This is something everyone should start doing ASAP. Even if you don’t have a lot of wealth now - or don’t see an urgent need for it yet, even - early investment actually makes sense:
The sooner you start, the more you stand to benefit from compound interest.
Most investments need time to mature to start paying you back with profit.
Starting early makes it easier to reach goals like financial independence earlier.
So, learning how to start investing is a worthwhile venture. However, there are some prerequisites for it, as well as basic rules to keep in mind.
We’ll cover those today in this beginner’s guide to investing. By the end of this guide, you should have an idea of how to start investing as well as where to invest and why.
The Prerequisites to Investing
It’s not something people usually want to hear when they look up a beginner’s guide to investment, but there are certain requirements you have to meet before you start.
As we noted earlier, investing is about growing wealth. It would be very hard to do that if you crippled yourself from the outset -- say, by racking up monumental debts that you’ll have to keep paying long into the future.
Hence the prerequisites for sound investment:
1. Learn how to budget first
Budgeting is basic but essential. If you can’t even budget your monthly spending in the household, it’s highly unlikely that you’ll be able to manage investments.
Besides, budgeting is critical if you’re not someone with high net worth from the outset. You’ll need to budget wisely to be able to set aside money for your investment account.
Note that if you’re a fresh grad or young adult who’s recently joined the workforce, we’ve put together a budgeting guide for Singaporeans in your situation. Check it out for some advice on how to create a budget!
2. Set aside an emergency fund
You shouldn’t invest money that you can’t do without in an emergency. The main reason for this is that an investment generally only sees decent returns in the long run.
If you need to sell investments in order to get the funds to deal with a crisis, you’re likely to lose money on your investment (and miss out on the chance for future profits).
To prevent that from happening, build an emergency fund. You can fall back on the fund when you need a quick reserve of cash to defray emergency expenses, and leave your investments intact.
If you’re not sure how to go about this, check out our guide to building up an emergency fund. Read it first for tips on how to meet this prerequisite before you start investing.
3. Pay down as much debt as possible.
This should be self-evident. Again, you want to make sure you don’t cripple your future finances, so anything that can drain your investments’ profits has to be slashed.
Furthermore, clearing away debt makes it easier for you to allocate resources to invest. It means you’re more likely to have spare cash to put in investments, as opposed to payments for debts.
When you pay down debts, focus in particular on the high-interest ones first. Even if the principal on them isn’t too large, the high interest on payments means you’ll be paying more overtime if you don’t pay them down quickly.
Identify Your Goals
All right, let’s say you’ve met the prerequisites. Don’t think you can leap straight into investment just yet!
You should start by defining your goals first. Answer this question: why are you investing money?
This matters because your goals actually affect how and in what you invest - there are investment products and investment approaches that are better for certain goals than others.
For example, are you investing to pay short-term or long-term needs?
Savings and cash management accounts are preferable for the former. Meanwhile, investments that should be held for a long time are better for the latter.
Moreover, low-risk portfolios are better choices for people with short-term needs. That’s because their needs have a closer time horizon.
By the same token, investment into higher-risk options is thus more viable for people with long-term needs. After all, they have the luxury of time before investment profits become urgent.
This is also why identifying your goals goes hand in hand with figuring out the kind of investor you are.
Do you have a high or low risk appetite? Do you prefer to be an active investor or someone who leaves most of the management to a broker or advisor?
All of these are pretty much tied to your purposes for investing. There will be some individual variation, of course, but you can usually guess someone’s goals for investing based on where they are in their lives:
1. Young Adults / Early Career
At this point, you have a long investment time frame, putting you in a great position for both risk-taking and long-term benefits from compound interest. Typical goals here would include these:
Building a cash reserve through savings.
Starting an investment portfolio as part of a long-term plan for financial independence.
Trying to ensure money you’re earning keeps up with inflation through high-yield investments.
2. Married Adults / Mid-Career
Once you have dependents, your goals may well change. For instance, at this stage, people’s goals often include building up investments for their children’s future.
Even if you’re not married yet but are planning to settle down eventually, that may also factor into your investment goals. You may be investing to plan for the costs of buying a house, having a family, or even sending kids to university, for example.
3. Middle-Aged Adults / Pre-Retirement
Around this stage of life, people’s investment goals tend to be about preparing for retirement. Being middle-aged also gives you a shorter time frame for your goal.
That’s why this is when people tend to focus on lower-risk or steadier investment options, retirement accounts, and pension plans. It’s also the stage when it becomes vital to think about topping up one’s CPF (Central Provident Fund).
4. Retired Adults
For most retired adults, the goal of investment is just to ensure self-sufficiency. At this point, you merely want to ensure that you have a steady retirement income stream.
As such, you also want to focus on stabler, lower-risk investments. That’s because your goals don’t give you much of a time horizon and all you need to do now is ensure that there’s a reliable stream of cash coming in.
How to Pick Investments
Now that you know why you’re investing, it’s time to pick which investments you should get into. The first thing to do is to understand the types of investments.
We’ll take up the most common ones here. (Keep in mind that there are many other investments you can make besides the ones we list!)
For example, there are also futures, precious artworks, direct loans to small businesses, certificates of deposit, Treasury bills, etc.
We won’t get into them now, however, as they’re not generally advisable for beginners. Instead, we’ll begin with the option most people think of first when the term “investment” is mentioned.
1. Stocks
Stocks are also called equities. A stock is simply an ownership share in a company, so when you say you have stock in Company XYZ, you mean that you own part of it.
Back then, stocks tended to come in “full shares”, e.g. you could have 1 full share in Company XYZ.
Of late, though, fractional shares have become more and more popular.
These are basically shares in a company that are less than a full share - they’re only a partial share in a single stock.
This may come in handy if you have limited capital for investment or the stock you’re buying is extremely expensive. That way, you’ll be able to afford to invest in it, despite your limitations.
Blue Chips and Stock Assessments
Now, while stocks are fairly popular investments, they aren’t exactly safe. They’re subject to market volatility and thus can be dangerous to first-time investors.
The safest and best stocks are called “blue chip stocks”. They’re from companies that tend to be large, well-established, and known for maintaining a strong record of profitability even during market downturns.
An example of a blue chip stock is DBS. Other examples are UOB, OCBC, Singtel and CapitaLand.
In any case, most investors would like to get their hands on blue chip stocks. Unfortunately, they tend to be pricey and the demand for them often outstrips supply.
Still, if you can get blue chip stocks to start with, it’s a good idea. Even if you find some blue chip stock for sale, though, take note that you should try to avoid sinking all of your investment capital into a single company.
Preventing that from happening is called “diversification”. It’s a way of protecting yourself from downturns in the market.
The way it works is simple: if you have stock in just one company, you’re ruined if that one company tanks.
On the other hand, if you have stock in 5 companies (a diversified portfolio), you’re not likely to be ruined by just one of those companies failing. After all, you’ll still have your investments in the other 4.
We’ll talk more about diversification later, but it’s worth keeping in mind. For now, let’s just go over some other ways of assessing the potential of a stock for investment:
2. Bonds
Next are bonds. These are just loans that you give to a company or even a state entity. They’ll pay you back in the future (usually after a set number of years), but with interest.
Bonds are a popular option for parking money. In fact, many even prefer to use them to hold cash reserves as opposed to savings accounts, because they tend to have higher interest rates.
That being said, they also still tend to post lower long-term returns than stocks in fair market years.
On the other hand, they’re also more secure than stocks. This is since the only risk comes from the possibility of the bond issuer (the entity you’re lending to) going bankrupt.
3. Mutual Funds
These are perhaps the best options for beginners to investment. This is because they’re a mix of investments - usually stocks and bonds - sold together.
This means that when you buy a mutual fund, you start out with a diversified investment from the get-go. As mentioned earlier, this can help you protect yourself against drops in prices for one stock or another in your portfolio.
How to Buy Mutual Funds
Generally, mutual funds are actively managed by a professional manager. To buy mutual funds, you have to go to a mutual fund company, like UOB United or Fidelity.
You usually have to meet a minimum investment amount with the mutual fund company too. This varies from company to company, with some requiring as little as $500 and some requiring as much as $5,000.
Take note, however, that you can check if a company has waivers for minimum investment accounts. It usually gets waived based on your automatic monthly investment.
For instance, if you meet a minimum amount for your automatic monthly investment, they may waive the mutual fund investment minimum.
Mutual Fund Sales Loads
You should also note that mutual funds may have sales loads. These are sales charges or commissions that go to the brokers or agents of the mutual fund company.
The sales loads may be charged whenever shares in a mutual fund are bought (they’re called “front-end loads” then) or sold (then they’re called “back-end loads”).
However, there are also no-load funds, which are for shares distributed directly by the investment company.
You don’t have to pay a commission on no-load funds, so you may want to ask your fund manager for a list of such funds if you want all your money to work for you.
Mutual Fund Expense Ratios
Keep in mind that even no-load funds don’t mean zero fees for you as an investor. For instance, all mutual funds involve management fees.
You can get an idea of how profitable a fund still is after management fees by checking its expense ratio or ER. This is a ratio of how much of the fund’s assets are used for administrative/operating costs.
A good ER can be anywhere from 0.5% to 0.75%. Lower is usually better, but if that’s your concern, you should check out ETFs or exchange-traded funds: they often have lower ERs than mutual funds.
4. Exchange-Traded Funds
Also known as ETFs, these are another popular option for first-time investors. They come in packages of many investments like mutual funds but are traded through the day like stocks.
The best ETFs tend to have low management costs (hence the low ERs mentioned earlier), lower minimum investment requirements than mutual funds, good tax efficiency, and high liquidity (you can sell them fairly easily).
That being said, some ETFs have relatively low diversification and can incur high brokerage fees if you like to trade regularly and in small amounts.
If you’d like to add small parcels regularly to your fund, for instance, it would be best to skip the ETFs and go for another type of investment fund: the index fund.
5. Index Funds
These are similar to mutual funds, only they follow the performance of a certain market index. They’re a mixed parcel of company stocks that needs very little management, translating to low management fees.
To get what an index fund is, you just have to remember that a market index is a bunch of stocks listed on a stock exchange. A good example of a market index here is the STI or Straits Times Index.
Index funds are generally considered a safe investment option. They seem to yield only average returns in the short term, but in the long run, tend to outperform actively managed funds.
This is because most market indices rise in the long run. They can suffer volatility and even major downturns, yes… but for the most part, they go up over the years.
That being said, keep in mind that certain index funds will be riskier than others. If a fund tracks indices in particularly volatile sectors, it’s going to be less “safe” as an investment.
Finally, note that index funds and ETFs can be hard to distinguish from each other in Singapore. This is because some ETFs track indices too and perform much like index funds.
In fact, some ETFs here are index funds… although not all index funds are ETFs.
6. Real Estate
This is one of the classic investments people can make. It’s also the only physical investment on our list!
There are obvious advantages to investing in real estate. First, it’s not necessarily bound to the stock market’s movements, so it can be a bit safer from market volatility than other investments.
It’s also a potential source of tax benefits as well as passive income (say, if you plan to rent out the property). Moreover, with proper management and maintenance, it could even be a physical investment that appreciates over time.
On the other hand, real estate can be a tricky market to get into because you can end up with a bad property after paying through the nose. It also tends to be expensive and can be difficult to manage, aside from lacking liquidity.
Note that there are now crowdfunding options for real estate investment, though. For instance, you can invest just a few thousand dollars in a real estate venture to own part of it.
Unfortunately, most of these crowdfunding ventures tend to happen on an unsecured basis, which increases the risk for the people participating in them.
Open Your Investment Account
Once you’ve decided which type or types of investment to make, you need to open your investment account.
Since stocks are the most common type of investment, let’s go over how to do that for stock investment in particular.
Some of the steps here will change if you switch to other investments, but not by much. For instance, if you’re investing in mutual funds instead, you’ll simply have to open an account with a mutual fund company instead.
In any case, to invest in stocks, you’ll have to open a brokerage account. You can do that in at least 3 ways: with a full-service broker, a discount broker, or a robo-advisor.
Let’s take up the choices here.
Why Use a Full-Service Broker?
If you want as much financial assistance and advice as possible, go with the full-service brokers. These can provide you with insight on everything financial, from tax advice to insurance plan selection.
This is the origin of the term “full-service”, obviously. They’re better thought of as financial advisors who can also execute stock transactions, as such.
The only downside to hiring such a broker is that there are obviously fees for it. Moreover, such brokers usually require a minimum amount for clients’ investment accounts, although this varies.
Why Use a Discount Broker?
If you’re a hands-on investor who wants to make most of the decisions about stock and investments and have relatively little investment capital, go with a discount broker.
They don’t give you investment advice. What support they offer is largely technical, so if you need advice on whether or not to purchase a particular stock, they won’t be of help.
Moreover, they generally charge fees per transaction. So, depending on your movements, they may still get fairly pricey despite being called “discount” brokers.
For example, if you plan to enter or exit positions often, you may be looking at a lot of trading fees. Of course, if you’re planning to hold stock for a long time instead, the opposite may be more likely.
That being said, this option isn’t generally advisable for investment beginners. It gives you total control over your portfolio and lets you skip certain fees, but it also takes a lot of time and effort.
Why Use a Robo Advisor?
A robo advisor is best for those with limited capital who prefer the “set it and forget it” style of investing, i.e. passive investors.
Robo advisors are algorithm-run investment management services. They can build and manage your portfolio for you using computer equations.
With robo advisors, you don’t have to make too many decisions, as they handle most of it on your behalf. They’re also relatively low-cost, as they tend to charge a flat rate based on your investment account’s size.
It’s often 0.25%, although this varies by robo-advisor. Note that this also goes on top of any fees you may have to pay for ETFs or mutual funds.
Invest and Work on Diversification
Once you’ve opened an investment account - whether it’s for stocks, funds, or something else - you can begin investing. The way you do it will depend on what route you took in the previous step, of course.
For instance, if you have a full-service broker or financial advisor, you can rely on their advice for most of your investment choices.
Without that, though, you’ll have to make many decisions yourself. There are some basic rules to follow here that can guide you throughout the process, but the most important ones are researching and diversifying.
Let’s take them up here:
Research Investments
It doesn’t matter what you’re investing in: there’s always some risk involved, whether it’s a bond (usually very low-risk) or a stock (can be very high-risk).
That’s why it’s up to you to do your due diligence before putting money in an investment. Research it to find out just how much risk may be involved.
For instance, we talked earlier about mutual funds being relatively low-risk investments. But mutual funds are also packages of multiple investments bundled together.
This means there’s always a possibility of a high-risk investment being bundled with the rest of your investments in a mutual fund.
Hence, before you buy a mutual fund, you have to inspect it with care. Look for possible high-risk stocks in the fund, for instance, or ones from markets known for uncertainty.
You don’t have to do all of the research by yourself, by the way. There are some financial experts willing to do one-off consultations. You can also ask more financially savvy friends for advice!
Diversify Investments
We already mentioned this before. Diversification is an essential investment strategy because it spreads out your risk as an investor.
If you’re properly diversified, the failure of one investment wouldn’t cripple your finances too seriously. Your other investments should still be viable, so you’d have other sources of wealth on which to fall back.
Unless you have high net worth, however, you probably won’t be able to diversify your portfolio too much from the beginning. Proper diversification costs money.
This is especially true when investing in stocks. It can take a significant number of stocks in a lot of different companies to actually get a fairly diversified portfolio.
Still, this is something you can work up to bit by bit. With stocks, for instance, you can start out with as few as 2 companies. You should keep adding more from different companies as time goes by.
Note that diversification is something that should happen on multiple levels. For example, you should diversify by investment type, industry, and even geography (try international stock mutual funds).
Optimise Your Investments
Once you’ve begun investing, take note that there are still some things you can do to optimise your investments. Here are just a few tips:
You may not be able to control how much your investments pay in the long run, but you can control how much you pay for them now. Always keep an eye on the fees you pay for investments per year to see if they’re worth it.
Check if your investment account’s annual fee can be waived if you hit a minimum balance on the account, then aim for that balance.
Check brokers’ lists of no-load funds and no-transaction-fee funds to avoid heavy sales or redemption charges on mutual funds.
Unless you’re interested in day trading, avoid staring at your stock prices to prevent yourself making risky sales and jumping the gun.
If you’re interested in stocks, it’s best to invest in them through mutual funds, ETFs, or index funds so you can diversify immediately. Unless you feel particularly strong about the chances of a particular stock, don’t invest in just one company for your first moves. Focus on broad-based options at first.
Where Do You Go from Here?
As you can see, getting started on investing isn’t as hard as some make it out to be. With the right know-how and a fair measure of financial responsibility, investment is within just about anyone’s reach.
That being said, bear in mind one of the things we stated earlier: every investment comes with a risk.
Thus, the moment you begin investing, you have to be prepared to face the possibility of losses if something goes wrong.
For first-time investors, the easiest way to minimise this risk is to seek help from the experts. After all, even if you start studying investment strategies and rules now, you still won’t be able to catch up with those who’ve made it their profession.
If you’d like to minimise your investment risk as much as possible, let’s connect. At Financial Fortress, we can put you in touch with financial experts who can show you how to carefully shepherd your wealth and grow it efficiently.
Besides personalised and professional financial advice, you’ll also get an intensive education on how to work towards your financial goals.
Whether it’s financial independence or the security of your children’s future, our advisors can help you in achieving your aims. Contact us to learn more about finance and investing today.
Written in collaboration with our financial advisory partners at Virtus Associates.
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