How to invest without being a stock trader

I feel your pain.

There is way too much information on finance out there. And the language used sounds foreign and intimidating. Much of it would only be useful if you wanted to become a “Certified Financial Something”. If you just want to get started investing, most of it is absolutely useless to you.

For example look at this screen:

Untitled

This is what I got googling “how to invest”. Please raise your hand if you didn’t feel overwhelmed looking at that. Do you really have time to deep dive into “How To Diversify: Using The Concept Of Correlation”? The title is already putting me to sleep. I have some good news for you though, you can invest and make money without learning about any of this.

Here’s what I promise you’ll get from reading this article:

  • No overwhelming choices. You don’t have to pick stocks to invest
  • No confusion. I break down what the world’s best investor tells us about investing
  • No vagueness. I let you know exactly where and how to get started

You can do better than most “experts”

With the information out there sounding like a foreign language, it’s no wonder we go to our ‘experts’ to give us advice. This has always been a sore point for me because the average person can do better than the vast majority of so-called “professional” fund managers.

Fund managers keep their fancy offices and suits whether or not they are doing well for their investors. That’s because they get paid first, regardless of how well they do their job. Sure, you can argue that clients will leave if they under-perform.  But I’ve worked in the financial industry for a long time, and trust me when I say there’s about a billion ways to make a fund’s performance look rosy. It’s all in the fine print.

Over the long term, if these “professional” fund managers were judged by their ability to generate above average returns (after fees) for their clients, most of them would be out on the streets selling tissue papers in the food courts.

Don’t believe me?

Warren Buffett, the Oracle of Omaha as he’s frequently called, challenged a group of hedge fund managers to beat a low cost index fund over a period of 10 years beginning in 2008. It’s now been 7 years and his low cost index fund is comfortably thrashing hedge fund manager Protégé Partners by 63.5% to 19.6%.

And he has this to say to us :

  • Average investors do not need to pick stocks to get satisfactory results
  • What to invest: own a number of business that will do well in the future
  • When to invest: accumulate over a long period and never sell when news is bad

What to invest

When you buy a company’s stock, you’re actually owning a piece of the company. But over the long term, owning just one company is very risky. Think of the number of Fortune 500 firms that have disappeared over the years. Do you want to be stuck holding onto a company that has gone bankrupt? Nope. We want to spread out our risk by buying a large number of companies that we know on average will do well.

The S&P 500 that Warren Buffett mentions is an average value of 500 large companies (from different industries like Google, Goldman Sachs, McDonald’s etc). In Singapore, we have the Straits Times Index which is an average of the 30 largest companies from Singapore (SingTel, DBS, SembCorp). Stringent criteria have to be met before a company can make it on to these indices. And they regularly kick companies who have stopped meeting these criteria out. If we think of this in football terms, making it onto an index is like making the top 4 in the Barclays Premier League.

Buying all these companies’ stocks individually is very troublesome and impossible with the funds available to your average investor. An index fund solves that headache for us. The index fund manager buys all of the stocks in an index for us. (Since this not a very difficult job, we want to look for one with the lowest fees possible).

When to invest

You should start investing today. You do not need a bed made of cash to do so. You can start from as little as $100 a month. (If you can’t put aside that amount of money, take a look at this article). Warren Buffett talks about accumulating over a long period of time and not selling when news is bad. So we should put aside a fixed sum every month for investing. I’m sure you’ve heard the old battle cry of “Buy Low, Sell High”. Since we want to accumulate over long periods, we really should change this to :”Buy More When Low, Buy Less When High”. I’ll give you a way to do that right now.

You start by investing a 100 dollars a month into the STI Index:

  • Month 1, the STI index is 50 dollars, you buy 2 shares
  • Month 2, the STI index rises to 100 dollars, you buy 1 share
  • Month 3, the STI index drops to 25 dollars, you buy 4 shares

Wow! With some simple math, you are already doing what the pros do! Buying more when low and buying less when high!

So what did we learn here?

To get started investing, we just have to invest a fixed monthly amount into an index fund.

Get started today

Now, I promised you to get specific on steps.

If you want to invest in the S&P 500 index fund, a great low cost fund is the Vanguard 500 Index Fund. Unless you have a US bank account though; it’s not really suitable for Singaporeans.

For Singaporeans, you’ll want to invest in the STI ETF (an exchanged trade index fund for the STI index) which has an average annualized return of 6-9% after dividends.

There are several providers in Singapore that offer automatic regular investment plans for the STI. You can find a comparison of them here.

I personally use the DBS Regular Investment Plan (RSP) because I don’t want to lie to myself. I do not have the discipline to invest regularly on my own. You can potentially buy ETFs with a lost cost broker and save on the 1% sales charge.

BUT think of the barriers you have to cross:

  1. You need to open a separate investment account
  2. You need to physically log into this account to buy every month
  3. You need to keep buying when everything in the market is “red”

Most people who say they want to invest can’t even cross the first step of opening a separate investment account. I, myself, find it tiring to have to log into another account and buy stocks. Not to mention the stress when you see everything is going down. I have a very demanding full time job, I’ll rather not worry about investing.

To start your DBS RSP, simply log on to your DBS bank account, look for Investments, and pick “Set Up Exchange Traded Fund Regular Savings Plan (RSP)

DBSRSP1

You should see a screen like this, pick NIKKO STI ETF from the list and an amount you’re comfortable with

DBSRSP2

Hit next and you’re done!

So you’ve seen how professional fund managers don’t actually do all that well and gotten advice from the best investor. Warren Buffett has shown you what and when to invest. And you’ve seen a simple method to get started investing in Singapore.

And it doesn’t involve tracking your investments like an overeager stalker on Facebook. You can relax because your investments are automated. When the next crash comes, and everyone is panicking and/or blaming the government for causing another financial crisis, you can smile, and say “Really? I’m not too bothered”. Safe in the knowledge that your automated investment plans are buying more and more stock for you as the market goes down.

PS: If you want to know more about investing…

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Comments

  1. Nice article!
    Just one question though, how do you know when to sell the shares? Or should you just keep investing for the future instead of selling it?

    • Hi Yuuka! Yup, you should think about it as an investment for the future (think long term), ie. to fund your retirement / kid’s university fees.

  2. You might want to advise people to change brokers once they hit $500/month 😛 1% is quite a huge drain

  3. What’s up everyone, it’s my first pay a quick visit at this web site,
    and article is in fact fruitful designed for me, keep
    up posting such articles.

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