In one of my last post,Investing on Your Own May be Much Better , I shared why it may be much better for us to invest on our own as opposed to buying unit trusts.
Questions that comes to mind may be:
1) How can I start investing?
2) I do not have any experience or do not know how to invest.
3) If the professionals cannot help build my wealth, how can I, someone untrained do it?
In this series, I will talk about how anyone can start to manage your own investments and depending on what your investment objectives are and how much interest you have, we will go deeper and talk about aiming for higher returns by increasing your financial knowledge.
I just want to give an overview of what I will be talking about next in this series.
1) Investing in ETFs
2) Investing in Individual Stocks (Overview)
3) Understanding the secret language of investing
4) When to buy at a fabulous price!
5) Case Study
6) Managing Your Porfolio for Financial Freedom.
In my workshops, I will teach the participants how to do what I am going to share with you. And I have seen many of them grow to become very successful investors, some even achieving financial freedom in a year. So I want you to know that what you are about to learn is powerful and practical.
Now, this session, I am going to share with you how you can pace the market and make a returns of 8% to 12% per year. While most fund managers aim to beat the market and fail, retail investors like ourselves can simply buy the market and enjoy the business returns.
The idea behind this is simply to buy an Index ETF. This is almost like you are buying into the entire stock market of a particular stock exchange.
For Singapore Stock Market, we can buy the STI ETF (which is the ETF of Straits Times Index), and for the US Stock market, we can buy the SPY (The S&P 500 ETF) or the DIA (Dow Jones Industrial Average ETF).
Quick Overview of Index ETFs
1) STI ETF – is a representation of the Singapore stock market. If you buy into it, you are buying a fund that is tracking the performancing in order to match what the Straits Times Index is returning. This ETF also gives dividends.
When you buy the STI ETF, it is almost like buying a fund that consists of the 30 stocks in the Straits Times Index.
2) SPY or DIA are ETF that tracks the S&P 500 and Dow Jones Industrial Average. In this case, when you buy the ETFs of SPY and DIA, it is like buying into the 500 stocks in S&P or the 30 stocks in the Dow Jones.
Now, let’s say we want to have a really hands free investment strategy and instead of wanting to pick individual stocks, we want to simply buy into the Singapore or US stock market (which will probably allow us to beat most fund managers), here are the steps:
1) Open a Brokerage Account
2) Save some money
3) Keep buying into the ETF whenever you save enough so that the commission you have to pay the brokerage is less than 0.5% of what you invest in.
Buying every month may or may not make sense. For e.g. you decide to invest $200 per month, but the brokerage fee is $20 per transaction, that is 10% off your investment. Hello…. that will not be a smart thing to do! Your investment will need to make more than 10% just for you to break even! So if the transaction costs is $20, save up to $4000 or more before buying into the market.
3a) Monthly Investment Plan. If your brokerage offers a monthly investment plan which gives a much lower commission per month, then you can check it out and work if it makes sense. Talk to your broker and ask him/ her, but do your own calculations!
3b) Timing the market? Since we are saving up and will not invest every month, are there best times to enter the market? Well obviously the best time is when the stock market just crash. Oh yeah, Dow Jones did a study and showed that all the market crashes recovers within a year (usually less). When 911 happened, the stock market crashed, but it only took 69 days for it to recover to post 911 levels. Imagine the wealth you had made!
But if the market isn’t crashing that often, you can look at investing in May and Sept. These are traditional months where stock market are lower. I am not asking us to speculate, but if we need a plan to enter, then just set your investments in at May or Sept. May or may not be the best time, but at least we get a plan going.
Things to note when choosing other ETFs on your own is the management fees involved. We definitely do not want to pay anything more than 0.5% of management fees since there isn’t much management anyway. And of course, purchase ETFs managed by reputable fund companies! Any possible idea is to invest into the company managed by Warren Buffett, which is Berkshire. http://finance.yahoo.com/q?s=BRK-B&ql=0
This company is in the business of buying great businesses, led by one of the greatest investor in the world.
So here is another option.
This method will help you pace the market and beat most fund managers. In my next few posts, i will share how we can beat the market by choosing great stocks at a good price, this method is identified as Value Investing.
To your dreams,
Mind Kinesis Research Team