How to approach investing

When I first started investing a decade ago, investing was a really foreign and daunting topic. Unfortunately fifteen years of education from primary school to university didn’t teach me how to manage my money at all – which really sucks because the only way I learned was through some of my own failures.

Many people think investing is not really for newcomers because of how volatile the market is – it goes up slowly and then nosedives quickly – resulting in a significant paper loss. We cash out and sit out of the market, only to see it bounce back harder.

We are loss-averse after all, and when we see our portfolio in the red we get emotionally stricken and make bad irrational decisions. It’s perfectly common to buy high and sell low if we approach investing with exactly that kind of  wrong mindset.

How to go about investing starts with the why. Is it because you want to take big risks and earn quick returns or to grow your money over the long term without wiping out your capital?

Although it seems like a simple goal, growing your money can take multiple forms. 

You can make heavy risky bets and grow your money, but lose them all too. 

Or you could take the safer, sustainable approach to grow your wealth, but at the expense of missing out on huge returns on stellar stocks.

Investing is extremely personal, extremely subjective and sometimes extremely emotional – there is no one single way or best way to invest, and ultimately, investing needs to be tailored to you – your risk appetite, your knowledge and your goals.

Investing to me is about building a base of financial assets. This base will be my pool of funds that I will draw down during retirement, but at the same time, I want this pool of funds to generate periodic cash flows to fund some of my expenses.

When I think about financial assets, I look at it from the perspective that financial assets will grow in value as the economy grows. Companies make profits and reinvest their earnings or give out dividends, raising their stock prices or returning value to the shareholder. The concept of businesses and trade won’t go away, and investing in companies in the long term has paid off for the past several decades. 

Holding cash is not an option because cash itself doesn’t produce income or value. In fact, it loses value to inflation – where each dollar of money buys less with time. The cash needs to be put to work through investments.

If you’re new to this exciting world, don’t worry, I want you to take small baby steps. Start with a balanced and diversified portfolio that’s lower in risk – maybe 40% bonds and 60% stocks.

Notice I said diversified – this means not buying and speculating single stocks but buying a basket of stocks.

I also said balanced – this means a good mix of volatile and less-volatile assets.

You can use a roboadvisor to help allocate your funds or build a portfolio by yourself. The key here is get started, but start with a low risk diversified portfolio. 

Contribute a small amount to this portfolio every month, maybe $100 or $200 per month depending on your ability – and don’t look at it. Don’t check in every day and don’t look at the stock market.

Then go ahead and live your life.

Every year, once or twice a year, open your portfolio and ask yourself if you’re happy with the returns, and if you’re in the red, are you able to tolerate the losses. If you cannot – reduce the risk further and don’t look at it for another 6 months.

As you slowly optimise for the correct risk level of your portfolio, you’d be able to build the right kind of investing mindset – stable, sustainable and consistent growth over a period of time without bothering about the political and economic noise. 

When executed carefully and consistently, even a simple balanced portfolio with little management can produce annual yields of above 5% without heavy drawdowns.

Once again, the hardest part about investing is the mindset – getting started and staying invested.

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