Personal Finance Back to Basics: Amateur Investing (Part 5)
At this point, I have blogged about having a healthy emergency fund, having clear financial goals, and placing financial boundaries. Finally, I can write about my favorite part, where I am currently thinking about investing.
I entitled this post “amateur investing” because I hope to make this real and practical for the average (non-finance) reader. I myself am not a professional investor; I have a primary profession that I love and focus a lot of extra time honing. I simply don’t have the time to analyze companies and stocks every day. This means that I do not know where to best invest our money, but after reading this post, I hope you realize that it doesn’t really matter.
Basic Principles
Part of being responsible means being smart and not keep most of our savings in the bank. Your emergency fund and some excess for daily expenses should be more than enough. Here are my basic guiding principles as an amateur investor who simply wants to be responsible with money.
Beat the Inflation Rate
The TOP reason why most of our money shouldn’t be kept in the bank is inflation. Inflation is a percentage rate that represents the increase in basic livelihood costs year on year. For example, if the inflation rate is 5%, then something that costs $100 today will likely cost $105 next year. While buying coffee the other day, my colleagues and I realized that the typical Kopi-C now costs $2 when it was only $1.8 previously, this indicates an $11% inflation rate. Since bank interest rates are typically way below the inflation rate, it is not a good place to store our savings.
Interestingly, there seems to be many ways to look at Singapore’s inflation rate:
- Official inflation rate seems to be ranging between 0.4-0.6%
- But perceived inflation seems to be more around 3% (Update: Link missing, but article was about inflation being 3% if you factor out real estate and car prices)
Based on these 2 articles, I feel that 3% is more practical (given my Kopi experience).
Doing Nothing Will Cost More
When it comes to investing, I would rather do something than over-analyze and end up doing nothing. This speaks of opportunity cost. Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another (Source: Investopedia).
Yes, I may end up making the wrong investment; but that’s okay, wrong financial investments usually only result in losing ~10% at most anyway. I’d rather do something and lose 10% than do nothing. I’ll just charge that 10% to experience.
Don’t Try to be a Professional
While it is good to keep learning and be as proficient as possible, I should also remember that there are trained professionals who trade and invest for a living. Even if I have an MBA and specialized in finance, it will be foolish of me to think that I am better than the young financial analysts who have been working day in and day out.
So unless I am planning to switch careers, I should just stick with financial instruments that I can handle. In short, I should avoid individual and short-term stock trading but instead have a longer investment horizon. This is why I prefer mutual funds, unit trusts, ETFs and REITs. I’ll just rely on these instruments which were created by the real professionals.
Don’t Hold on Too Much
As we talk about savings and investments, be careful to remember that money shouldn’t be held too tightly. Be generous and treat giving as an investment for the world where our children will grow up in. Invest in the next generation, give to charity, and help the poor and needy. Giving has a way to recalibrating our perspectives and of loosening money’s grip on us.
These twelve Jesus sent out with the following instructions: “Do not go among the Gentiles or enter any town of the Samaritans. Go rather to the lost sheep of Israel. As you go, proclaim this message: ‘The kingdom of heaven has come near.’ Heal the sick, raise the dead, cleanse those who have leprosy,drive out demons. Freely you have received; freely give. ~ Matthew 10:5-8 NIV
Investment Allocation
With this, our current investment allocation plan looks like this:
| Purpose | DBS Bank | Manulife Smart Wealth | REITs | Mutual Funds, Unit Trusts, ETFs, etc. |
|---|---|---|---|---|
| Daily Cash | x | |||
| Emergency Fund 1-3 months | x | |||
| Emergency Fund 4-6 months | x | |||
| Education Fund (Secondary++) | x | x | x | |
| Excess Cash (Retirement, Real-Estate, etc.) | x | x |
DBS Multiplier Account
Although bank accounts give very low interest, we all still need at least one. The main reason why I chose DBS was that it has a promotion to waive the minimum daily balance if you open an account online (at least when I opened it).
Most Singapore banks today have a gimmick for earning extra interest. In this case, we can earn extra interest by (1) using this as my salary account, (2) getting a credit card and (3) getting an investment account. This at least gave me extra comfort to store our daily cash and emergency funds in this account, since the interest is only slightly below my assumed inflation rate.
Manulife Smart Wealth
The investment account from DBS that I opened is called Smart Wealth from Manulife. This fund is expected to perform at 7-8% per year. The drawback is there is a 5-year lock-in period where I will also need to deposit a fixed amount per month for the next 5 years. This is perfect for our educational fund, the only risk is that we will have to continue depositing here even in the event that we have to leave Singapore in <5 years.
REITs
REITs are not available in the Philippines, which is why I only tried this out recently even though I’ve been getting a lot of recommendations in the past. There are only a few big real estate companies in Singapore and REITs are way to get dividends based on these companies’ rental income (at least that’s my layman’s understanding of it). So far, I just followed the recommendations from online recommendations like this one and I’m getting decent returns from it. Roughly around 6-7%.
The other nice thing about REITs is that these are traded like stocks. Meaning, I can liquidate these quickly when I need them. This is why I currently think it’s safe to place our 4-6 months emergency fund in blue-chip REITs.
Mutual Funds, Unit Trusts, ETFs, etc.
While REITs are a current favorite, I shouldn’t put everything in REITs. I need to look for other investment instruments that give 7-10% returns per year in the long term. These are some of the things that I’ll be checking out in the next couple of months.
Conclusion
After weeks of writing these 5 posts, we are finally at this juncture. In these posts, I shared my current thoughts about what my family should be doing. It is only a partially executed plan as we are still at the first step—completing our emergency fund.
While some of the things discussed may sound complicated and difficult, it really isn’t. All you need to do is develop that muscle by being disciplined. Once it’s developed, things like daily expense tracking and living below our means will become much easier. May God bless you in your own financial journey.
The Lord bless you and keep you; the Lord make his face to shine upon you and be gracious to you; the Lord lift up his countenance upon you and give you peace. ~ Numbers 6:24-26 ESV