The Definitive Guide: How to Start SG Stocks Investing [Part-3]
I hope you are, same as me, eager for the next series of the SG guide to Singapore Stock Investing. It has been a week since my last series, a little behind on schedule.
This is a long series, hope you don’t fall asleep, if you think you would then bookmark it and return back later. On this series, I will be touching on investment return expectation, Strait Time Index ETF, why investors lose money and more.
I’ll try to explain it as detailed as possible, providing you further resources/tools and breaking down difficult concept into easily understandable chuck to the best of my ability.
Hope that by the end of each series, you have some takeaway be it on knowledge or the resources that I included in this guide.
A little recap on the part-2 of the definitive guide to SG stocks investing:
- Is Investing Seminar/Course Worth Paying Thousands? – It depends on individual financial situation. I do not encourage it and I don’t think it is worth the price unless you know what you are paying for. I’ve included some of the courses that I think is worth going, and forums thread discussion you might like to read.
- How Much Money Do I Need to Start Investing? – It depends on the stocks you are buying, for blue chips probably around $10,000+ you can build a portfolio of 20 stocks by buying 1 lot each. Alternatively, you can go for lower cap. stocks, STI ETF or through DCA approach towards your investment target.
- Make money from stocks through Capital & Dividend. – Capital gain is the rise of value in the shares you are holding, you are required to sell it to realize the gain. Where else with dividend you are able to cash out the gain from the capital without having to click the sell button. Total return on stock will always be the same due to the CD-XD effect. For more info: Investing for Dividend Income(Passive) is A FairyTale !!!
- Strait Time Index – The most important thing to know in stock investing, I’m was half way done, and I’ll continue further in this part-3 series.
- How To Be An Investor That Doesn’t Get Scam? – Any promised of investment return exceeding 7% annual return should be looked with a caution’s lens. You have to factor the risk of losing your capital for attractive return.
I believe your reason and mine for stock investing are probably the same, that is to make money. The ultimate goal that everyone has which make us trade our valuable time in reading books and blogs for investing literacy and hopefully one day we are able to achieve early retirement or financial independence through successful investing.
One question that I had back then was how much can I make in stock market, realistically and without taking significant amount of risk, of course. The number I got did not look sexy(even now). And some of the readers who are reading this might be disappointed upon knowing the number.
Expectation on investment return
But I think it’s good to make thing clear so that you can have the right expectation on the return you could have in stock investing. I’ll start with a question first.
Do you know that if you are able to achieve annualized return of 10% over 10 years you are considered to be rather impressive investor? Yes, because most investors do not even come close to 10%.
Majority of stock “holders” aren’t even positive in their portfolio, and it’s not hard to find anyone around you who has burnt their fingers on stocks during stock market crash. Even without the crash, most investors are still not having the return they desired.
At least that is what CPF report shows us: 40% of its members are losing money, 15% of members are making above 2.5%. And 45% of the members are getting 0% – 2.5% investment returns.
I hope I do not depress you further on the example I’m about to show you, but that’s the reality of investing, it takes time. A lot of time to make it work.
No matter how good you are in stocks investing you would still not able to get rich through stocks investing with small amount of capital without taking huge risk(which then is called speculation and trading).
If you do the math by using 10% compounding annual rate of return(CAGR) on your investing capital let’s say $10,000 for the next ten years. The return you get is merely close to $26,000. It’s just a gain of $16K for ten years!
Even if your capital is $100,000.
10% a year would only give you $10,000, and that is $833 per month. You are not even close of being rich by having additional $833 per month. And this figure is based on a high annualized return of 10 per cent which is not easily achievable. Hence, the eventual return you get back is likely to be a lot lower.
It’s called Compounding…
Then why should we still invest? Because there is a magic calls compounding where one would otherwise not get it outside of investing. I’ll not go into detail as there are plenty of sites have explained in greater detail, so I’d just attach some of the important snippet for your easy reading.
“Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following:perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why.And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.” — DOW Theory Letters
Investor B & Investor A
“Investor B opens an investment account at age 19 and for seven consecutive years invests $2,000 on which they earn 10% p.a. after tax. Investor B then never makes another contribution – $14,000 in total invested.
Investor A makes no contributions until age 26 and then contributes $2,000 every year for the next 40 years until age 65 at the same theoretical return of 10% p.a. Investor A contributes $80,000.” — WealthConnexion
Look at the amount invested, year end value and net earnings. The finding is surprising.
By the age of 65, both investors year end value are roughly the same! Investor B makes 66x of the capital invested where else Investor A only make 11x. One important factor that illustrated in this example is time, investor B despite having less invested capital but it still get close to A because of the 7 years of head start.
We’ll continue with STI…
Each country, or to be exact each stock exchange usually has at least 1 index. So in Singapore we have STI, and in the US there’s S&P 500 representing top 500 US stocks by mkt. cap, Dow Jones Industrial Average(DJIA) representing top 30 stocks listed in US stocks exchange and the list go on. To see the whole list Click here.
Since we are investing in Singapore stocks so the most relevant index is STI, then the next you want to pay attention to is US S&P500 as it’s the most frequently mentioned and most followed index throughout books and media.
In case you are not aware the world of financial markets are highly interlinked, and with US being the largest economic powerhouse in the world. Whatever happens to their market the world will get affected. 2008 mortgage subprime crisis was the best example which bought STI lost close to 60% of its market value within a year.
Strait Time Index, is an index.
You need to invest through Traded Exchange Fund…
Remember Strait Time Index(STI) is an index like many other price index. We can’t invest directly in STI. We need fund manager to create a portfolio that replicate that index, and because the “fund” which is the portfolio is trading at the stock exchange. Hence, it’s called Exchange Traded Fund. Yes, they are like normal stocks that you see on the exchange where you can buy and sell. For more info on ETF : http://www.investopedia.com/terms/e/etf.asp
So remember there are 1. An index which is created by index provider like provider of gold index, oil index, steel index, average commodity price index, stock exchange(s) specified index i.e S&P500, DJIA & Nasdaq , country specified stock index i.e STI, world stock index and more.
2. An ETF providers, they provide a fund which is exchange-traded to replicate the performance of the index. This is where we invest in an index(the ETF). Currently for STI, there are two ETF providers which is by SPDRS and Nikko(links below).
So often we hear people saying they invest in STI/Index, what they are referring to is actually STI ETF(to myself as well).
I have included the below video on ETF Creation and Redemption for your better understanding on ETF:
How STI works can explained by the following:
30 companies by mkt. cap. – The index tracks the price of the top 30 largest market capitalization stocks in Singapore.
Quarterly rebalancing – This is to ensure that stocks remain in the index are the top 30 largest by market capitalization. The index will do a quarterly review and substitute stocks that do not meet the top thirty largest criteria. It also has 5 stocks on its reserve list to anticipate the substitution.
Capitalization-weighted – Individual stock in the index is weighted accordingly to their market capitalization. So larger stock by mk.t cap. will carry a larger percentage weighting in the index.
Note: capitalization-weighted bases its weighting on mkt. cap. and, NOT through market price.
If you have tried to sum up the top 30 stocks price and found that the price is not what you see on STI ETF that is because 1. you ignored the weighting factor and 2. The market price of the ETF which has nothing to do with the sum of its total 30 stocks but due to general market supply and demand. In short, you can’t do that.
NIKKO – http://www.nikkoam.com.sg/etf/sti
Good Read By MotleyFool – An Investor’s Guide to the Straits Times Index
The Little History Of Singapore Stock Market Historical Performance
If you are new to investing then I believe what I’m about to show you might surprise you, to certain extend you might be scratching your head thinking are why people still not making money on stocks investing.
Let’s take a look at our home market index STI first.
Can you see at a longer time-frame the market always seems to be going up.
Let’s take a look at the US market S&P 500 as well
The upward trend of S&P500 is more evident. If you were you invest $10,000 in 1960 on S&P500, your return by now with be growing to $59,000!
As it shows above, there are plenty of ups and downs in the stocks market over the past twenty years. In the short run it is hard if not impossible to tell whether stock market in going up or down. In the state of euphoria what seems to be high always turns out to low and gotten higher in the end.
And the opposite is true, what seems to be depressed and thought the worst would last indefinitely turns out to be short-lived, and rebounded sharply in the next few years.
The father of value investing and the mentor of Warren Buffett, Mr Benjamin Graham said “In the short run, the market is a voting machine but in the long run, it is a weighing machine”.
What that means is that in the short term prices are driven by sentiment which is random while in the long term it is driven by something you can actually measure more concretely such as the company or market fundamental value.
On a wider time-frame like 10 – 20 years, like the one I show above it is not hard to recognize that investors who invest in the market index over a long period would almost always make a good return.
I thought of including this table to give you some rough ideas on the market return you may get by investing in market index ETF.
You might be wondering why S&P500 10 years CAGR return shows blank on the table but on my above chart it stretched out to 1950. The reason is due to the ETF “voo” by Vanguard was created less than 10 years ago. Hence, it doesn’t have the result prior to that.
ETF returns are usually similar with the actual market index which is their main purpose to replicate it. However, there may be times where it deviates. The term they commonly used is tracking-error which will be showed at the respective ETF website in percentage.
Another thing to note is ETF market return will normally be higher than the actual index because market indices do not factor in the dividend payout where else ETF does.
Why stocks market always rise over time?
I have embedded a video from Adam Khoo(yes, that motivational speaker!) which he explained really well on the reasons why the market would always rise in the long run.
And, please don’t get too carried away on the moving average as that is not an investing approach.
Why Do People Still Lose Money?
I thought maybe I should address this as some of you might not aware, do you know that in stocks investing the most you could lose is the amount of money that you have invested?
Yes, unless you are using borrowed money to buy stock. For example for a $1 stock, with $10,000 invested capital. Should the stock turns to zero, the max you would lose is only $10,000 and not more.
Now you might be thinking, then why are there people burnt their hands or gone bankrupt in a way that they lose more than they could pay? That’s because they are not buying via cash account but through a margin account.
In financial term, this is known as leverage. The extension of the above example would be, despite the cost of 10,000 shares is $10,000. With a 5 per cent margin, you are only required to pay $500 to purchase $10,000 worth of stock.
In this case your return is amplified by 20 times. If the stock price rise by twenty cent you will be making $2,000 instead of $100. However, if the price drop by twenty cent you will also be losing $2,000! And, there will be an limit of loss amount where once you exceeded the broker would require you to add on additional capital should you want to continue to hold the losing position.
That is when you have met your margin call.
Oh and remember when you are trading on a margin account, it comes with an interest(usually) as the brokerage is actually lending you the money to purchase the stocks. If you are unable to meet the margin call, the broker may force sell your shares and demand the remaining shortfall.
The capital that I’m showing is considered low, most traders don’t trade with just $500. If it $1,000 that loss could amplify to $4,000. And the above is only 20 per cent drop in share price, what if it halved? You can do the math yourself, my point is you will lose your pants.
Trading & Market-timing – Many people thought they are investing just because they are holding stocks and not lottery ticket. It is not the assets you buy that determine whether you are a trader or investor rather It’s about the approach that you are taking determine who you are.
If you are buying stocks because you want beat inflation and to grow wealth, with respect to the risk you are taking. And you know equity is simply part of your on going your asset allocation then chances are you are investing and not trading. As you see from the above Singapore market always goes up in the long run. Hence, odd is in your favor.
“Successful investing is about making your money grow faster than inflation, minimizing loss and allowing compounding to work its magic”
— Show Me The Money 1
Why is trading not encouraged? Because the odd of success is very low, there’s a saying the 90:90:90 rule on retail trader – 90 percent of traders, lose 90 percent of their money in 90 days. If you somehow managed to make it 100 days you are pretty impressive!
Then, how to those traders that appear in advertisement make so much? Because they make their money through low risk high return business – they sell thousand dollar trading courses 🙂
Herd Following – Buy when everyone buys and sell when everyone sells, another easy way to lose money. Psychologically it makes sense to follow others since it gives you the conform you need for your sleep. Unfortunately, stock market is not a place where you can follow others.
One of the reasons people lose money despite the market always rise is because of the investor inability to control his emotion and follow what others are doing, during market crash those investors will sell at the worst possible time. And, during market boom the same group of investor will always buy at the worst possible time.
I hope you are not one of them if you are reading this.
You need to have your own opinion and analysis, and the temperament to ignore the crowd and hold on to your idea. Benjamin Graham says “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Hence, if your stocks ideas come from friends, relatives or guru then chances are you are doing it wrongly.
If you follow someone’s idea to buy should you also follow the someone’s idea to sell as well?
You should generate your own stock ideas, for myself I relied on screener. SGX has a good free screener, check my how-to guide if you haven’t.
And, forget about all those tips, those analyst reports. They are not standing on your interest which is the retail investor point of view, but they are on the sellers point of view.
In short they want you to buy, so that the stocks they bought 6 months ago could be liquidated through your help.
If you do not have the time, but you’re eager to invest then you should just invest in STI ETF and settle with the market return. And, since most people underperform the market that means you are likely to outperform everyone you knows. Not too bad right?
How much Can I Make From Stock Investing?
There is no better reference point than this, which is to look at STI ETF annualized returns over the past 10 years. And at the time of writing it is 7%, for more info click here.
You will often hear people talk about market outperformance and underperformance.
The word market is often referred to STI. Investor is said to outperforms the market if in that particular year his investment returns are higher than the STI return.
Why I think you should take investment returns as a pinch of salt.
This is something that many investors would probably not get it and causing them with lots of pain and frustration. That is when an investment return like STI shows to have 7% CAGR over the past ten years does it mean that if you invest at the start of January(remember CAGR and annualized return are used interchangeable?).
And you will be able to make 7% at the end of December?
Well, you probably know the answer is no. No one is able to time the market, and no one is able to predict the return of stocks. The ones who predicted has probably done so fifty over times.
Predicting investment performance is like guessing which sequence of flip would get you tail in a 50:50 probability coin flipping bet.
However, what you do know is that over a long period of time the odd of getting tail or head is 50 per cent in each of the flip and it does not mean that if you get 5 heads straight, your sixth flip would get you a head. As you know, each flip is an independent event which has no influence over the probability of the next.
I believe the same apply to stock investment return as well, according to Tweedy, Bowne even for the legendary investors to be underperformed the market(S&P 500) 40% of the years are not uncommon.
Hence, do not get panic or over worried if your investment doesn’t yield you the result you desire. Investment return is something that you can’t push to gain more, it takes time.
I thought to include this video for better understanding on probability and psychology, this is more for traders but the same concept applies to investors as well. Beside that, this is a really good interview video with Mark Douglas.
How much stock investment return would it consider as an average?
The first thing to consider is which index to benchmark with, in our case that will be STI and its CAGR over the past ten years is 7%. Hence, you may take this as the average return that a investor would gain for passive index investing.
I don’t know how realistic is this figure but someone has commented in ValueBuddies that by using value investing approach investor should be able to achieve 15% CAGR.
I also came across a blog post by Jae Jun the owner of OldSchoolValue who invest in US stock mentioned that his CAGR is 18% and it can be better should he not experimenting with different value strategies, and he personally knows retail investors who achieve twenty over per cent.
Nonetheless, I personally feel that being able to achieve 10% CAGR is considered rather impressive. Anything above is bonus and any number below is normal. We are not able to control the outcome, what we can merely do is to make sure we do the best in our investment decisions.
Congratulation for making it all the way here.
I hope you have enjoyed the guide thus far. On the next series I’ll be going through bid & offer, basic ratio and fundamental so that you can have some basic ideas how much a stock is worth relative to its value.
I’ll try to create a table of content for the ease of navigation. Do continue to support this guide and subscribe to my blog on the below orange box if you haven’t.
Thank you for reading, hope you enjoy!
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