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Is investing in stocks suitable for you?

Sunday, August 11, 2013

Some people say that investing in the stock market is risky. Some people say that leaving money in savings accounts is risky. So, if we put half of our money in the stock market and leave half of our money in savings accounts, we are doubling our risk exposure. No? Oh dear. This is what I have been doing. I am in trouble, I think.

If you feel that this blog post is beginning to feel somewhat surreal and totally not in AK's style, you are not alone. I feel the same way too.

From time to time, I receive emails from readers and, from time to time, there would be a reader who says he has $5,000 or less to invest with. The question is usually what should he invest in? Personally, I feel that the pertinent question is if he should be investing at all? Well, if I had only $5,000 or less to invest with, I wouldn't.

I think the money is better left in an emergency fund. It is too little to really make any big difference to a person's financial well-being even if he were to achieve, say, a 10% return a year. After 7 years, that $5,000 would become $10,000 perhaps but there is also a chance that he could suffer financial loss in that 7 years. There is no guarantee that he could get back his money if he should need it.


Of course, now, we have services like those by POSB and OCBC which will allow such investors to gain exposure to the stock market. Matthew Seah, a guest blogger here, has also blogged about these recently.

Reading the latest issue of The EDGE, I came across this:

"Ultimately, the most important thing for investors to know is whether exposure to stocks, in whatever form, is really what's best for them. Banks such as POSB do, of course, inform investors of the risks they would face with any investment products they sell. Yet, are stocks really a good investment for someone with only a small amount of savings? Is the risk that comes with potentially superior returns really acceptable? Can long-term financial goals be achieved through spending less instead of investing more?

"Portraying a portfolio of blue-chip stocks as a packet of crisps isn't helpful to investors who might be searching for answers."

This reminds me of a comment by a reader and fellow blogger, hyom hyom:

"I am always attracted to posts that talk about money-saving techniques because successful saving provides a guaranteed return as opposed to investing which is risky by nature."

Although I feel that we should learn about investing as early as possible in life, I agree that investing in stocks, for various reasons, might not be suitable for everybody at one point or another in their lives.

Related posts:
1. POSB Invest-Saver account.
2. OCBC Blue Chip Investment Plan.
3. Know what is good for us.
4. A common piece of advice on saving.
5. At what age to start investing in stocks?

26 comments:

yeh said...

I have 6 digit in my bank account.
but I not sure whether should buy stock or property.

I think I am really a very lousy investor.

la papillion said...

Hi AK,

I agree. 5k is not a good sum to start. I always say 30 to 50k is a good amount to begin. If someone can save that much, it shows that the person is ready for the next level of financial evolution. One must know how to save first, how to protect your savings/assets then how to invest. Roughly in that order.

With a sizeable starting capital, one will be less likely to dabble in pennies too because of lack of money to buy the bigger caps.

AK71 said...

Hi yeh,

At least you have the luxury of choice. :)

I do not think that you are a lousy investor. You are just being cautious and undecided. ;)

AK71 said...

Hi LP,

Yes, I agree. However, I am sure that there are people who do not agree with us. This does not mean that they are wrong, of course. :)

Recently, I watched a program in which Sean Seah, supposedly an investment guru in Singapore, said that we should start investing even if we had as little as $100. That boggles my mind.

SG Young Investment said...

Hi AK,

I think many young people start investing with very little money because they hope to earn more money in the stock market. Many of them do not invest for the long term but trade short term in the markets. I have friends who dabble in stocks and forex and got themselves burnt with debts due to the high leverage of financial products like forex.

The irony is that those who invest hoping to make money most of the time lose money. Investors who focus on picking great stocks and have patience will end up with great rewards.

AK71 said...

Hi SG Young Investment,

A good observation. :)

I remember how a friend in university ended up with $20k in debt due to failed trading activities. His dad had to bail him out. He was lucky his family was well to do.

I like to say that the stock market will always be there. There is no hurry. :)

Modest Ken said...

Hi AK,

I've bittersweet feelings. In reality, it is good for investors start young. Ironically, you will need a decent if not colossus amount to reduce risk appetite but often fulfilled at late age.

Kindly enlighten me please.

Modest Ken said...

Hi Ak,

I've bittersweet feelings. Conventional wisdom states that you have to invest in the early age to reap seeds (investments) being sowed.
Ironically, to acquire a relatively decent if not colossus capital is often fulfilled at late age in life in order to reduce risks exposure.

Kindly enlighten please.

AK71 said...

Hi Ken,

I think there is really no right answer to this. All of us have our own beliefs and values. :)

I have just been engaged in a very long discussion in Facebook because of this blog post.

In that discussion, I was the only voice in my camp. Everyone else thought that even with $5,000, people should take the plunge and buying an ETF linked to the STI is a no-brainer.

Like I said in our email exchange, I cannot give advice. I am not allowed but I can share my thoughts. So, consider your own circumstances carefully and think about what people have to say. Then, decide for yourself. :)

Matthew Seah said...

Hi AK,

Though I agree that 5k is a little small, I do think that any excess above your emergency fund requirements can be put to better use. It's just that people needs to be educated on investing vs. trading.

Of course, one should also look at their future expenditures to decide whether to invest. If you are saving for a house within 5 years, then the 5k should be put in a fix deposit rather than the stock market as the risk of a downside during the 5 years persists.

On the other side of the coin, if one already has a house, the excess cash after expenses can still be used for investing either for children's tertiary education or for ones retirement. Though the returns are low at the start, the power of compounding still will work its magic on the meager sum over long periods of say 20-40 years

AK71 said...

Hi Matthew,

Everyone has different circumstances. Of course, circumstances permitting, we should think of how to make our money work harder for us. :)

Matthew Seah said...

Hi AK,

TOTALLY AGREE. If that guy with $5,000 is me, I wouldn't invest right now.

AK71 said...

Hi Matthew,

You have wisdom uncommon for a person your age. :)

When is your next guest blog post coming har? ;p

Matthew Seah said...

Hi AK,

No inspiration...

SG Young Investment said...

Hi Ak,

I read the discussions you had on Facebook. Interesting to see different views of other people especially young people disagreeing with you. Well, I'm young too and maybe I should comment on what I think.

$5000 is definitely too little if one wants to buy stocks in Singapore. It is impossible to build up a portfolio of stocks with just $5000. Of course there are other plans like the newly launched Posb invest saver which allows people to invest in an ETF with just $100/mth.
However, investing in an etf will not allow someone to learn how to pick stocks as its more passive. I believe that to be a truly successful investor, we need to learn active investing. For me, its interesting to learn how companies earn profits, what affects a company profits and how to choose great companies to invest in.

Then again, it depends on individuals if they like investing. I have friends who know that investing is important but they just do not have the interest in it. For them, they will want to just invest passively.

AK71 said...

Hi SG Young Investment,

Very well put. I am impressed. :)

I always say that there is room for diversity in the world. For sure, I am not saying and I have never said that my way is the only way or the right way although some might not shy from such claims.

Like I said in FB, "Unless it is a subject with immutable laws, we have to appeal to each person's sense of what is right and there is always room for disagreement." :)

SG Young Investment said...

Hi Ak,

Well, as long as your way works for you then its good enough. For young people like me, we do not have enough experience in the markets and certainly will not know if our ways will work in the long term.

Some young people can make great returns in the stock market now but lose it all back and more during the crisis. I have to constantly remind myself to be humble and learn from more experienced investors like you ;)

AK71 said...

Hi SG Young Investment,

And I have to remember that there are many investors out there who are more successful than I am, that I should keep an open mind and listen if they are willing to share.

Thus far, I have been lucky to come into contact with bloggers and readers alike who have shared unreservedly. :)

Stoical Keynes said...

Hi AK,

I agree that for a person just starting out, successful saving might have more of an impact than successful investing.

Using your $5k example, if one was able to double the returns from 10% to 20%, the result is $500 more. But it would take tremendous effort to achieve the skill (or create the luck) to do just that. Whereas not upgrading a phone or not buying a designer bag could easily "earn" you that $500 already.

But investing is a process/learning journey best learnt early. $5k might not allow a person to pick stocks himself (with sufficient diversification), but he could easily enrol into some passive investment scheme. At the very least, he could learn to manage his emotions or identify his risk appetite (if the market tanks), when the investment amount is still small.

AK71 said...

Hi Stoical Keynes,

There are many ways to look at this, no doubt. :)

Although I feel that there is no hurry to invest in the stock market for anyone who has very little capital and that it makes more sense to invest in knowledge first, I cannot say that any such individual's decision to go ahead to invest in the stock market is wrong.

I might have grown more conservative in my old age. ;)

Solace said...

Hi AK,

i started investing couple of yrs back at mid twenties, before i start investing, i have to clear the following the steps 1st:

1. Set aside 6 mths of emergency funds (1st priority)

2. Take care of personal finance, learn to be a saver, clear debts, settle insurance matters, frm there build up investment fund over time.

3. This is the most tedious part. Building up investment knowledge. learn abt TA and FA, am i a value investor? a trader? know abt one objective in investing.

last of all, don't ever stop learning, there are new things to learn frm market every week.
e.g i am still learning frm u time to time.
haha.

AK71 said...

Hi Solace,

You planned a very sensible path and I think anyone who is thinking of investing in the stock market should do something like what you have done. Would you like to write a guest blog post on this? ;)

Personally, I feel that 6 months worth of expenses in an emergency fund is not enough. I think 12 months is safer although I set aside enough for 24 months. :)

Knowing our motivations is definitely important. This knowledge is more important than FA or TA. People get confused and don't know what to do when they don't know what they want.

I am glad that you have found my blog helpful and if everyone shares unreservedly like you, this blog will be a more rewarding place for everyone. :)

AK71 said...

Hi Solace,

Something I shared on Facebook recently:

"My emergency fund factors in possibly having to care for my parents, sister and niece. So, it has to be bigger. I also bought a place early last year. I bought a 10 year term plan to cover the mortgage and I also put aside 24 months worth of mortgage payment just in case (I did not die). I have to put aside money for the running cost of my car, again for 24 months. I also have to put aside money enough to pay for my insurance policies for 2 years. It all adds up to quite a bit. So, when Flying Dutchman said he puts aside money to cover 2 years' worth of expenses, I thought I was doing it right too. LOL."

Solace said...

Hi AK,

i will be glad to a guest post for u in the future. i will email u the content once i find the inspiration to do it :)

thanks for sharing unreservedly for the past few yrs, i look forward to learn frm u and other experienced investors in this blog.

AK71 said...

Hi Solace,

I am very happy that you will be a guest blogger here at ASSI. I look forward to your contribution. Thanks. :)

marrythaigirlsingapore said...

Well if I could have 10% return every year, I wouldn't just let my $5000 do the work, I would throw in another $5000 at the end of each year, so at the end of the 7th year, I would approximately have $57,179.44 in stocks (40k capital, 17,179.44 returns), of course I would have to make sure the $5000 that I commit each year falls under "extra cash", which I don't think is too much to ask for.

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