It is never too late to start investing. I have some friends who started dipping their money into investment recently. I personally guided them along the way, giving them advice on what instruments they should be going for as beginners. I would like to take this chance to share with readers my strategy that I advised to my friends and hopefully this article would be helpful for anyone who is lost when starting out their own investments. My investment journey has not been smooth-flowing when starting out in 2018 but I have learnt along the way and I would have implemented the same strategy that I will be sharing today for myself if I could turn back time.
The Four Key Considerations
1. Do you have sufficient coverage insurance before starting investing?
Having insurance is a necessity in life. However, it is more important to have essential insurance coverage that benefits us. Insurance is essential but we need to know what’s the essential insurance policies to get and what should be avoided. Seedly has a pretty illustration on what one should get.
The key point to take note is NOT to mix insurance with investments. One FP shared that he would not get an ILP. This is opposed to some FA whose first investment is ILP. He mentioned that ILP is a better than nothing plan. As it is a mix of investment with insurance, it doesn’t seem to be a worthy plan after comparing it with other products. He shared that ILP has high distribution cost or commission, where the majority of the premiums paid for investment are meant for commission for the first few years. He gave an example where his friend’s ILP will take up to 10 years to breakeven on the assumption that the annual returns are 8%. One cannot imagine the opportunity cost if they were to sign up for ILP compared to doing passive investing.
Therefore, for a FP to share the above, speaks volume on why ILP is not recommended and to be avoided.
2. Do you have at least 6 months worth of expenses as emergency funds?
Depending on your own risk appetite, the rule of thumb is to have at least 6 months worth of expenses as your emergency fund before investing.
If you are risk-averse, it is advisable to hold more funds meant for emergency funds. Though one should be aggressive but I think it is important not to over-invest your funds, in case any crash were to happen which will affect your daily livelihood.
With sufficient emergency funds, even if the market were to crash, your daily livelihood will not be affected.
3. Do you have recurring income while investing?
Barring any unforeseen circumstances, we are not able to predict how the market will perform in the future. It is important that you have recurring income while investing so that it will not affect your daily livelihood even if your investment portfolio is taking the hit.
If you are engaging in RSP, I think it will be wise to have recurring inflow of cash so that your existing cash will not deplete because of this commitment.
If you are picking your own stock and the trade value is large then I think it is better to have some recurring inflow of cash so that one you can build up your emergency fund. In case, the market crash again like in march, you wont fret and panic sell to raise cash
4. Do you foresee that you have any big ticket purchases in the near future?
Do not invest your money that you need in the near term or for specific purposes.
We are not able to predict how the market will perform in the future. You might want to consider higher yield savings account such as Singlife, Elastiq, Singtel Dash EasyEarn or even money market funds that have attractive yields in this low interest rate environment.
My point is for any funds you would need in the near future, you would want to pick a product that has limited to no downside risk but little upside returns compared to an ordinary savings account.
I believe that before investing, it is important to nail your own personal finance too. One of them is your own allocation framework. Seedly recommends the 50/30/20 allocation for your cash inflow, where 50%, 30% and the remaining 20% should be for expenses, investment and savings respectively.
It is up to you to decide on how much you should be allocating, the allocation framework given by Seedly is just a recommendation. There’s no hard and fast rule for allocation as everyone has different expenses patterns. It is therefore important to check on your past expenses, make some adjustments based on historical expenses data and set your own allocation.
My Investment Strategy for Beginners
My strategy for beginners involves the use of Exchange Traded Funds and Passive Investing strategy.
Type of ETFs
Exchange Traded Funds or ETFs are listed and traded on stock exchange. There are few types of ETFs in the market.
Index ETFs are passively managed ETFs that track or replicate the performance of a specific stock exchange. Therefore, the expense ratio is lower than actively managed funds like Thematic ETFs. For example, SPDR STI ETF (ES3) in Singapore tracks the performance of Straits Times Index while SPDR S&P 500 ETF (SPY) in United States tracks the performance of S&P 500 Index.
Sector ETFs is more well known in the United States. Instead of tracking the performance of the overall stock market, it tracks the performance of a specific industry in the United States.
Instead of purchasing physical commodities like Gold or Oil, you can purchase these commodity with Commodity ETF.
The above shows an example of Thematic ETFs. Thematic investing refers to the strategy of investing into an ETF that follows a particular trend such as environmental sustainability that is prevalent in society. For example, OGIG which is available on FSMOne’s ETF RSP, is an ETF that provides investors to invest in the largest global companies that derive most of their revenue from the Internet and E-Commerce sectors that exhibit quality and growth potential. Thematic ETFs have a higher expense ratio than Index ETFs as they are actively managed by fund managers as trend changes all the time.
Why ETFs and Passive Investing
Diversification and Cost Effectiveness, which are the advantages of ETFs, go hand in hand.
With ETFs, you can gain exposure to a basket of stocks in just one investment vehicle without having to invest in all of the individual stocks. This leads to cost effectiveness as you just have to pay a one off commission to purchase the ETF.
Imagining that you would like to replicate the S&P 500’s performance, without an ETF, you will have to purchase 500 individual stocks. This will incur a lot of commission just to replicate the performance.
When investing in an ETF, we always strive to keep our cost low. Therefore, Passive Investing is being used as we are not active traders that usually speculate how the price will be in the future. The practice of Passive Investing is to build wealth gradually by buying and holding for the long term. Passive Investing aims to avoid incurring extra commission from speculating future price movement as the main assumption is that stock price goes up over a long period of time.
Strategy 1: Robo Advisors
Robo Advisors will usually ask you a set of questions in which it will determine your risk level in investing and offers different portfolios based on it.
There are many Robo-Advisors out in the market with some more well-known than others such as Stashaway and Syfe. To me, when choosing which Robo-Advisors I will go for, it is really about the cost and what portfolio they offer.
I would first research on those that provide low cost investing and low barrier of entry. Stashaway, Syfe, AutoWealth and DBS digiPortfolio came to my mind. Syfe and Stashaway does not have any minimum investment sum and its cost is reasonable for retail investors starting out.
Next, I will look at the investment strategy which ultimately affects their product offering. In addition, for those Pseudo-Passive Investing robo advisors such as Syfe and Stashaway, you should also read more on their investment framework such as Stashaway’s Economic Regime-based Asset Allocation and Syfe’s Automated Risk-managed Investments to better understand how it will optimise portfolio to manage returns.
I have seen many people engaging in a lot of robo-advisors but I think at the end of the day, I would like to just focus on a few robo-advisors that give the most coverage worldwide at a lower cost. If one has many robo-advisors, I think it is time to review if there is any overlap among these portfolio offered.
Strategy 2: ETF Regular Savings Plan
Instead of answering a set of questions in regards to the risk level, ETF RSP gives you the freedom to choose which ETF to invest in. In my opinion, if you know what ETF to invest in then I would really recommend ETF RSP. I think the rule of thumb in investing in an ETF is to choose one that offers greater diversification like a Total World ETF such as VT or Index ETF such as VOO.
Further research has to be made in investing in sector or thematic ETFs as it requires a better understanding on how the specific industry will perform in the future. In this case, having professional advice such as robo-advisor will be preferred as there will be professionals who are behind the algorithm in choosing which specific industry or thematic ETFs to invest in.
Kristal.AI is the only robo-advisor that is similar to FSMOne’s ETF RSP but the latter is preferred. FSMOne’s ETF RSP offers fractional shares while you have to buy a minimum 1 share in Kristal.AI. What this means is that if VOO is getting more expensive every month, with FSMOne’s ETF RSP you will receive less fractional shares while you have to fork out more capital to own that minimum 1 share of VOO with Kristal.AI.
Robo Advisors vs ETF Regular Savings Plan
Both Robo Advisor and ETF Regular Savings Plan use the same investing style of ETFs and Passive Investing in building wealth. However, there are still some differences between both of them. As both are recommended by the investing community, it is really up to individuals in deciding which they should go for.
The first difference would be their fee structure. Take for example, ETF Regular Savings Plan by FSMOne, investors are charged by transaction cost, while Robo Advisors charge its clients based on AUM. As for Passive Investing, we would like to gradually build our wealth in the long term, investors will have to pay more every year as their AUM increases yearly. However, with FSMOne, though it might be more expensive in the short term, the cost will be cheaper in the long run because there’s no additional charges that are based on AUM and investors will only pay FSMOne when they initiate new transactions.
The style of investing is slightly different among the two strategies. I would say that ETF Regular Savings Plan are pure Passive Investing while Robo Advisors are pseudo-Passive Investing. Reason being, Robo Advisors tend to optimise clients’ portfolios so as to reduce the downside or to beat the returns of the market. On the other hand, ETF Regular Savings Plan stays true to the course as it does not provide any optimisation of the portfolio.
As active investing will try to beat the market’s returns, it will naturally incur additional charges. In my opinion, I think it is alright to enable portfolio optimisation function for Robo Advisors as it does not incur additional charges and if this optimisation indeed beats the returns of the market then I think there’s nothing to lose here. Some will disagree with me as it defeats the purpose of passive investing but at the end of the day it is really up to individual’s preference.
To me, cost is very important and therefore, I will primarily use the ETF Regular Savings Plan in building up my passive portfolio. However, I will not totally rule out on Robo-Advisor. I think Robo-Advisor can be used in areas where it is not served by ETF RSP.
It is great to start investing early but I don’t think one should rush into it if they do not manage their own personal finance well. Robo Advisors and ETF RSP require regular commitment and it is not really because I have spare cash then I invest. Therefore, it is important to evaluate based on the four key considerations in determining whether it is time to start passive investing.
On whether to choose between Robo-Advisors and ETF RSP, they are both equally good. I think it is really up to individuals’ decision in picking them, but one has to take note of the fee structure if they are gradually building up their wealth through passive investing. One shouldn’t rule out either one of them, as mentioned earlier, I feel that both ETF RSP and Robo-Advisors complement each other in the sense that Robo-Advisor can be used in areas where it is not served by ETF RSP.
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