 The Save and Invest seminar on 20 February at SGX jointly organized by CFA Singapore, SGX and MoneySENSE drew a large crowd of beginner investors. Photo by Sim Kih |
|
What are some common pitfalls encountered by beginner investors? This was addressed by senior CFA members who gave a straight and honest talk at a public seminar held in conjunction with the Save and Invest campaign jointly organized by CFA Singapore, Singapore Exchange and MoneySENSE.
Moderator The event was organized by the Society’s Advocacy Committee and took place at SGX Auditorium on Saturday, 20 February 2016. |
Jack Wang, CFA, CA, one of the panellists in charge of the simulated portfolios, compared stock selection to selecting a spouse.
The first stock that I bought was Capitaland. I remember buying it at S$1.01. Within 2 days, it went up to S$1.09. I thought I was brilliant, so I sold it off with an 8-cent gain. I was very happy for one day. The next day, it surged up to S$1.60. I thought making money from the stock market was so easy. This was when I was in PWC. After work, I would be very busy staring at Capitaland. I thought, ‘Wow! I can make 8 cents in one day!’
Jack Wang, CFA, CA
Partner, Lexico Advisory
Photo: Mabel LeeI was trying to figure out how I could make 8 cents every day. I succeeded for 20 days. Then, everything crashed, and I realized all the gains that I made in the last 20 days were gone! So, I realized it was a waste of time trying to make money from the stock market and my time was better spent at PriceWaterhouseCoopers.
Beware of get-rich-quick scams
Invest in your own learning before trying to make money from the stock market or getting your financial independence. At your age, you should focus on learning. If you are going to make mistakes, it is better to make them in your twenties.
When you make a mistake in your twenties, you can still laugh. When you make a mistake in your thirties, you feel embarrassed. When you make a mistake in your forties, you kill your family life. When you make a mistake in your fifties, you kill your whole life. When you make a mistake in your sixties, you go to jail – nobody will forgive you.
But the worst thing you can do is to sign-up for get-rich-quick courses like those that promise 800% returns within a month. If the instructor can make that kind of money, why would he bother with trying to make money from running courses?
Professional investors like us are very happy with anywhere from 5% to 15% returns a year. About 10 years ago, I attended one of these get-rich-quick courses out of curiosity. I had just passed my CFA exams and thought to myself: I’m a pro. So, I attended the 2-hour brain-washing talk that ended with a superb close: A Ferrari makes its grand entrance.
What has a Ferrari got to do with investment return? The strange thing was: Many people in the audience were impressed. I became depressed at having wasted 2 hours there. I had just witnessed the classic sales trick of getting the prospective customer to make irrational associations.
Two years later, I read about the instructor in the news: He was in a law suit for cheating in investment courses. He did not own the Ferrari. He had rented it to hoodwink the audience into believing that he was making the returns that he claimed were possible using his investment techniques.
| ♦ Save and Invest campaign |
|
CFA Singapore, Singapore Exchange and national financial education programme MoneySENSE have jointly launched a year-long campaign to encourage retail investors to save and invest for the future. The campaign commenced in January with a monthly column in The Sunday Times known as Save and Invest Portfolio Series, featuring simulated savings and investment portfolios of three Singaporean individuals and families at different life stages as follows:
The three simulated portfolios will be tracked over one year, guided by the following senior CFA members:
To ensure the investment instruments are easily accessible, all three portfolios are limited to instruments listed on the Singapore Exchange as well as the Singapore Savings Bonds, which can be bought via automated teller machines. |
The reality is: Many people are not telling the truth about their investment returns. They only tell you the trades they made money out of. They don’t tell you the trades that they get wrong.
Last year, the small caps in Singapore moved down by 60%. The mid-caps moved down by 40%. The Straits Times Index moved down by 26%. Chances are: 80% of those of you who traded last year lost money. The other 20% are just not telling you the truth.
Select your investment like you select a spouse
You are at the age when you are looking for potential partners for marriage. Don’t hang out with the handsome boyfriends and pretty girlfriends. All they do is break your heart! The same goes for selection of stocks and investment products. Do your due diligence and don’t go into any investment that you have doubts about.
There are some 300 stocks listed on the Mainboard of the Singapore Exchange, and more than double that number if you include Catalist stocks. There are even more if you expand your horizons. Hong Kong has some 2,000 listed companies. The US has about 6,000.
Look for honest companies
If I see anything in the annual report that I do not understand, I just move on and forget about that company. If the report is difficult to understand, it probably is because the management do not want you to understand. Stay away from the company that has something to hide. If you have friends that do not tell the truth or hide something, you can conclude that they are lying!
Allocation to stocks
As a rule of thumb, the percentage of your personal investment portfolio allocated to stocks should be 100 minus your age. For example, a 30-year old should have 70% in equities while a 70 year-old should have only 30% of his portfolio in equities.
Our advice is to avoid having more than 10% of your investment portfolio in one stock. Anything more than 20% is a gamble. You will have a better experience if you start with only 5%.
Don’t have a hundred stocks in your portfolio. A safe number of stocks to track closely is 5 to 10. If you believe yourself to be exceptionally intelligent, you can aim to track 10 to 20 stocks. Anything more than that is a stretch.
In my opinion, the number stocks that you can follow actively and take a focused position on successfully is like the number of best friends that you can handle. If you are one who can only have one best friend, I suggest you don’t even come into investing. Stay within your own career because your mind is wired to have concentrated risk. You don’t like to find out about others.
Diversification
You should have a negative correlation asset. Historically, bonds have a negative correlation with equities. When equities are doing badly, your bond portfolio will mitigate your losses. So, you don’t get very depressed.
ETFs are another good way to diversify because the cost of trading is much lower. Investing in ETFs can be compared to getting a low-maintenance spouse. When you open a trading account at a broking house, make sure you ask about the trading cost, which can be easily 1% to 2%. If your trading return is 5%, then such costs can easily eat into your returns.
| ♦ Stock screening and research tools on SGX websitePuah Soon Lim, CFA |
|
|
| ♦ Investment Constraints |
|
The portfolio allocation also depends on what kind of investor you are. Are you the kind of investor who can still sleep at night if your capital is down 20%? Or do you become very nervous if it is down 5% and can neither eat nor sleep Another investment constraint is whether you need your portfolio to generate regular returns. Retirees will need regular portfolio income more greatly than young investors. Related to this is investment horizon. Young investors have a few big expenditure milestones ahead of them, such as a wedding, a new house and kids. Usually, when you purchase a new house, you need to liquidate your portfolio for its down payment. Your future spouse will not be happy if your failed investments ruin your home purchase plans. Then, there are individual preferences that vary according to one’s unique circumstance. For example, an accountant working in a Big 4 accounting firm may have publicly listed clients which preclude him or her from investing in these companies. |
New investors should be balanced and conservative in portfolio allocation. One of the worst things a new investor can do is to make an overly aggressive bet, get burnt and decide that investing is not his game.
