Five things to know before investing in the stock market rally
Think you can turn S$10,000 into S$100,000 in two years? Want to invest half your salary in equities, like one financial blogger does? The experts have some advice on how to approach a volatile market.
SINGAPORE: The stock market this year has been on a roller-coaster ride, with record-setting drops and all-time highs being reached.
Just last week, US technology stocks saw their worst drop since March. Then on Tuesday, amid another widespread sell-off, Tesla shares tanked 21 per cent — the stock’s largest one-day loss in history — after its exclusion from the S&P 500 index.
A day later, the technology sector had its best day in the stock market in more than four months.
Before jumping on the investment bandwagon and ploughing money into what could be a volatile rally, here are five things to consider as advised by the experts.
1. ENSURE THAT YOU HAVE ENOUGH SAVINGS
He Ruiming, co-founder of personal finance blog The Woke Salaryman, said he usually invests half his salary in the equities market. This includes investing during the sell-off earlier this year and the subsequent rally.
But he advises individuals to have at least six months of savings in terms of expenses or salary before investing in high-risk products.
“We saw a lot more volatility because of COVID-19, and the stock market fell in March,” he said. “If you can’t outlast the volatility, you shouldn’t invest.”
Financial blogger Jeraldine Phneah is more conservative: For holding power, she recommends setting aside a minimum of 12 months’ worth of expenses as an emergency fund.
“If you don’t have holding power, you might be forced to let go of investments at a loss during a bear market,” she said.
2. TAKE THE LONG VIEW
Based on his interaction with millennials and members of Generation Z, He said many of them are entering the stock market but lack “the right mindset”.
Some want to make a quick buck and turn S$10,000 into S$100,000 in two years.
“But a lot of them will panic (when the market turns), especially first-timers. Some actualise their losses — they put in S$20,000, and if it drops by 30 per cent, they sell and then the market recovers,” he added.
“You have to ride the ups and downs; that’s the way to reduce the risk.”
His investment horizon is between 10 and 20 years.
Phneah agreed that investing in the stock market is for the long term, which requires work and patience. “It’s not a get-rich-quick scheme,” she said.
This is especially so since markets are likely to remain volatile for a while more, said David Gerald, the president and chief executive officer of the Securities Investors Association (Singapore), or Sias.
Retirees, for example, who have a short investment runway and limited time to recover from losses, should not invest in high-risk instruments. “But this was exactly what many retirees did for Clob stocks, Lehman Minibonds and Hyflux’s perpetuals,” he cited.
Paul Chew, the head of research at Phillip Securities Research, advised retail investors to buy shares based on a company’s normalised earnings and avoid valuing companies based on this year’s earnings.
“They’ll be negatively impacted by the virus at least in the short term,” he told the programme Money Mind.
3. DO YOUR RESEARCH, DON’T GET FOMO
Gerald also stressed the need be sufficiently informed about the companies that one buys into, as well as the state of the investment environment.
“Don’t have a ‘fear of missing out’ (FOMO) mindset — of rushing into the market to follow the crowd. This is a polite way of saying, investing based on greed,” he said.
Investing with knowledge is, after all, the right way to invest. On the other hand, investing without knowledge is gambling.
To inculcate this, Sias organises free investor education programmes, which teach people to use proper principles of investment instead of relying on tips and rumours.
They should also not leave decisions solely to brokers, but rather “familiarise themselves thoroughly with all the risks and features of the investments they’re considering with an experienced financial adviser before taking the plunge”, added Gerald.
Phneah is one who has taken investment courses, for example on dividend investing and growth investing.
“I’ve also attended some free webinars to deepen my knowledge, and follow other personal finance influencers who’ve achieved much better results, to learn from them,” she said.
“Being eager to learn and having a beginner’s mindset have helped me correct many mistakes I’ve made in investing over time.”
4. GO FOR HIGH-QUALITY STOCKS AND DIVERSIFY
In the midst of COVID-19 now, Gerald suggested going for high-quality stocks with strong balance sheets, which should enable these companies to ride out the storm.
Investors should also diversify their portfolio, with some representation of equities, bonds and gold, said Vasu Menon, executive director of investment strategy at OCBC Bank’s Wealth Management, who was on Money Mind recently.
“Gold is a useful hedge against (the) risk and uncertainty that lies ahead,” he added.
“The other element of diversification the investor should also pursue is time diversification … to spread investments out gradually over the next, perhaps, six months, 12 months. Keep some powder dry.”
Buying a company’s shares in phases helps to “take advantage of the volatility”, said Chew in an earlier Money Mind episode about how some stocks remained resilient when the market sank. “Don’t look for that elusive and expensive bottom.”
5. DON’T OVERCOMMIT MONEY YOU CAN’T AFFORD TO LOSE
Kenneth Lou, co-founder and CEO of financial platform Seedly, warned that investors should invest money they are willing to lose in the event the market drops.
“(Or) if a second wave of infections come around, then this should be a very big test of the reasons that you invest,” he said in another Money Mind episode. “Is it for the long term or … the short term?”
WATCH: Investment outlook for 2020 (6:40)
One information technology consultant, who started trading two years ago, told CNA Insider he lost S$50,000 in forex trading and gold exchange-traded funds.
The 28-year-old, who declined to be named, said his losses started building up last November and culminated in that big loss in May. He said he shorted some counters because “there was supposed to be a sell-off”.
“But the (price) went up. It was just wrong timing and bad management on my part,” he recounted. “It was like gambling … and the losses started to accumulate.”
As he was cash-strapped, he had used his credit card to finance his trading and needed Credit Counselling Singapore to help him restructure his debt to the bank. His stock market losses also cost him his marriage, he lamented.
“It was the trigger — that I didn’t manage to properly handle my finances. I wanted to plan for a longer future, to make some money before I had a kid,” he said.
“But I grew arrogant … Forex (trading) isn’t something you can learn overnight.”
In the past, he made thousands of dollars in forex trading and thought his winning streak would never end. “I’ve learnt not to be arrogant about it. There’s no such thing as fast money,” he added.