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Roads to wealth creation in the stock market.

Sunday, September 19, 2010

I have a friend who is very risk averse and views the stock market as being fraught with danger. He basically thinks it is a jungle with snake pits and poisonous gas bogs. I am inclined to agree with him which is why it would be most advantageous if we could find a guide who would walk with us.

Having read some personal finance blogs, my friend decided that he wants to try to grow his wealth by investing in the stock market. A commendable change in attitude, if I do say so myself. He wondered if he should try his hands at trading the market and maybe he could grow his wealth quickly that way. I told him candidly that he could make a lot of money that way, the operative word being "could".

I shared with him how I made a lot of money from March 2009 to January 2010.  However, that was a once in a lifetime opportunity to make a lot of money and I was lucky to have participated. Was I smarter than the average investor during the months of March 2009 to January 2010? I don't think so. I was probably just at the right place at the right time. I also told him how I lost a lot of money as well prior to the aforesaid winning streak. So, to me, it's quite simply all about timing.

I told him he might want to invest in some companies and REITs which could give him a yield of 6 to 10% per annum.  This took into consideration his risk averse personality and the current high prices of stocks. I believe that investing in some companies and REITs with strong fundamentals and high yields would be best for him. I also impressed upon him that these companies and REITs could see their share prices fluctuate but since he is investing for income, he should not have to worry too much about the day to day fluctuations in price.  This is a big advantage of this strategy.

How much could he afford to invest?  After doing some calculations with him, setting aside some money for emergencies and daily expenses which amounted to several months of his salary from active employment, he had a capital of about $100k to invest with. I suggested a basket of REITs and companies which he could invest in when prices next pull back (as prices do not usually go up in a straight line). Even then, don't put in all his money at one go but split his funds into 4 or 5 tranches.  This is hedging in case prices do fall lower.  If he has some knowledge of TA, he would be able to spot supports and trends and would be able to decide if he should pump in more funds each time prices fall or if he should wait.  So, learn some TA, he shall.

After saying all these, he was quite pleased but at the back of his mind, there remained a nagging thought that he could grow his $100k to $500k in the next 10 to 20 years if he traded actively. I simply smiled and told him to go learn TA and trading strategies.  There are courses, websites and blogs aplenty.  Could I not teach him? I told him honestly that I am not a very good trader. I use a combination of FA and TA, FA to spot undervalued stocks and TA to spot entry and exit prices. The high yield counters I am vested in could possibly go higher in price as they are mostly undervalued.  I am quite confident and comfortable with my approach. It might or might not be for him.

I also suggested that he could simply wait for the next crash before going into the market. Buy at a time when there is abject pessimism and when most have given up on the market. Is it that simple? Well, it could be, I said. Why bother to trade actively (especially if we are not very good at it)? Just save his money and continue saving as much of his monthly salary as he could.  When the next crash comes, he would be ready.  Load up then and get ready to see his wealth double ... or even triple.

The Chinese have a saying that "one type of rice feeds a hundred types of people". There are many strategies to wealth building and we simply have to find a strategy that works for us.  Age and how much money we have to start out with have a part to play, perhaps, but I believe that ultimately, we must be able to sleep well at night with our decisions in life.

Related posts:
Risks and rewards: TA and FA.
Excuse me, are you an investor?
Seven steps to creating passive income from the stock market.


Anonymous said...

"I told him he might want to invest in some companies and REITs which could give him a yield of 6 to 10% per annum."

That's a strong commitment that REITs should still perform in this range...

AK71 said...

Hi ilcourtilcourt,

There are a few REITs which are giving yields of around 8 to 10%:

I also believe that given the current circumstances surronding these REITs, the DPUs are sustainable. If circumstances should take a turn for the worse, well, we would have to react accordingly.

Of course, the unit prices of these REITs could appreciate and if DPUs remain unchanged, yields would fall. Decisions we make would have to be relevant to the prevailing circumstances. :)

AK71 said...

Revisited this blog post because I dug it up to place a link to it in another blogger's blog.

It has been almost 2 years since I last commented here and I am pleased to say that the S-REITs have not failed to deliver over the same period of time.

S-REITs are likely to continue doing well.

So? I am...
Staying positive on S-REITs.


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