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COMMENTARY: Investing and growing your wealth — it seems like everyone is talking about it these days, but how do you figure out how to even get started?

Start-up founder Shawn Low shares what he has learned about investing, based on his own research and experience when he was getting started.

Low is the co-founder of Better.com, a home ownership tech company that aims to make homeownership more accessible for everyone.

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By Shawn Low

So here’s a cool story.

A few years ago, a store cleaner in the U.S. passed away, leaving behind US$8 million (S$10.8 million) in assets. His name was Ronald Read and he led a pretty ordinary life. He did not win the lottery or have a sudden windfall. He also raised a family of four and put his two children through college.

His story would have gone completely unnoticed if not for the fact that he donated over USD $5 million (S$6.7 million) to charity upon his death, which caught the attention of news outlets like the Wall Street Journal.

That must have been a fluke.

While Ronald Read’s case is arguably the most well-known, a quick Google search would yield similar stories of others with ordinary jobs (teacher, grocer, librarian, secretary) who have accumulated vast fortunes in their lifetime.

How did they do it????

Many of them were great savers as you might expect but most were also good investors.

For instance, Read was described as a “good stock picker” who had the control to “buy and hold stocks for the long haul”. This required quite a bit of effort into studying and selecting individual stocks on his own.

Even if we don’t aspire to build fortunes worth millions, we can still practise the same ideas of choosing safe investments to put our money in and allowing them to grow for many years, to help build toward financial stability as well.

There are some anxieties when it comes to sinking hard-earned money into something as volatile as the stock market. If it’s anything as scary as it sounds, why should we invest at all?

Because cash loses its value over time due to inflation.

Historically, money held in cash generally lost half its value in roughly 30 years due to inflation; in the 1990s, a plate of chicken rice used to cost S$1.50, but today it’s roughly S$3.50.

Without investing, you may end up having much less than you expect when you retire. S$100 when you retire may only buy you half the things that S$100 gets you today.

And the good news is that investing does not need to be as scary or volatile as people think it is! But more on that later.

Oh, I thought people invested because they want to become rich.

For those who seek to grow their wealth, investment returns can supplement their savings from income, and allow them to achieve greater financial independence.

However, investing offers the opportunity to grow wealth and preserve capital.

Even if you’re not looking to become rich in retirement, it is worth looking into investment options for long-term capital preservation.

Right. But everyone has a different risk appetite. And mine isn’t like, super high or anything. So how can I go about it in a non-scary way?

First off, not everyone should invest.

You’ll probably feel safer about investing after you’ve set aside enough money for emergencies (typically six to twelve months of expenses, but really whatever you require to feel secure) and paid off any high-interest debts.

And when you do have a sum of money that you’re willing to invest, you’re probably better off not putting all your eggs in one basket.

But there’s so many products out there. How do you know what stocks to buy?

Like many Singaporeans, I started out buying single stocks in Singaporean companies on the Singapore Exchange (e.g., Singtel, Keppel, ComfortDelGro).

As a fairly risk-averse person, I always went in with the idea of only putting in what I could afford to lose, using only 10-20 per cent of my paycheck each month.

At that time, I didn’t really know what to look for beyond the fact that these were brands that I had seen, heard or used myself. To be honest, it felt a bit like gambling to pick which stocks would go up or down.

These days, I prefer to invest in a globally diversified portfolio of assets. Instead of picking individual stocks, I go for index exchange-traded funds (ETFs) or mutual funds that passively track a basket of companies (e.g. the 500 leading companies in the US, the 2,000 leading companies globally).

Diversified index funds have also been shown to routinely outperform over 85 per cent of professional investors.

Sure, but if I’m based in Singapore, shouldn’t I just invest in Singapore companies? And what about the Nikko AM ETF?

In general, global stocks have historically outperformed Singapore stocks over the past 20 years. World-class companies like Amazon, Tencent, and yes, even home-grown giants like Sea and Grab are not listed in Singapore.

In addition, companies listed in Singapore represent just about 1 per cent of global value of all companies, so if you’re hoping to invest widely, you may want to look beyond just Singapore.

For instance, buying a big, diversified ETF that tracks an All-World index will give you exposure to anywhere between 1,500 to 4,000 companies across more than 20 markets worldwide. This means that your exposure to the negative impact of any one company, sector or market suddenly going under would be limited.

If you’re interested in doing this, you will need to create a trading account with a stock brokerage firm before you can buy an All-World ETF like VWRA, ISAC or SWRD.

VW-what?

These are stock tickers that represent various world ETFs. VWRA is the Vanguard All-World ETF made by Vanguard, ISAC is the World ETF made by Blackrock and SWRD is a similar deal made by State Street.

There are some differences between them (e.g., the last one doesn’t cover emerging markets) but they are arguably more alike than not.

The monies put into these funds are invested into a large number of companies that typically represent 85-95 per cent of the total value of companies listed on global stock markets. So in essence, you are investing in the idea that our future world will be richer and more valuable than the world today.

It just seems so difficult to know exactly when to invest. And all of those big-time investors always seem to be “timing the market”. As a regular person, how can I possibly invest effectively?

What matters is the time in the market, not timing the market, so you have to be prepared to invest that sum of money over the long term without taking it out.

Stock markets can be really volatile in the short-term. Looking at the U.S. stock market (the world’s largest), there have been 12 times since World War II when the market has declined more than 30 per cent within a year.

However, if you are investing for the long-term and can ride out the ups and downs, this risk is significantly reduced. Your chances of making a return also increases.

In a 150-year study of the U.S. stock market by Nobel Laureate Robert Shiller, if you invested for:

• One year, there was ~30 per cent chance you’ll lose money (and ~70 per cent chance to gain money).
• Five years, there was ~15 per cent chance you’ll lose money (and ~85 per cent chance to gain money).

In the last 150 years, there has also been no 20-year period that had a negative return (i.e., an investment made in the total U.S. stock market has historically always gained money if it was held for 20 years). Note that this was true even through two world wars and major market events like the Great Depression.

Oh, a guaranteed return over 20 years? That seems like a good deal actually.

Nothing’s 100 per cent guaranteed. But looking at historical trends, it’s very probable that you will have returns if you can stay in the market over the long haul.

Great. Anything else I need to take note of?

Hmm, different investments may have different types of costs. For instance, there are likely fees which you will have to pay annually, so you should probably take that into account.

What! Like credit cards?

Not exactly.

Most investment products charge a certain percentage of their investment in fees (expense ratios), which are used for administrative and other operating expenses. These are over and above any trading fees that you have to pay the brokerage. All in all, it could be anywhere between 0.1 per cent to upwards of 1 per cent in fees annually.

Keeping fees low is crucial for investors because the cost differential over time could be massive.

Imagine two individuals that had put aside S$2,000 every month to invest in the S&P 500 index since 1990 - Person A and Person B. Person A bought an S&P 500 ETF with an expense ratio of 0.7 per cent whereas Person B bought another S&P 500 ETF with an expense ratio of 0.2 per cent.

In 2020, Person B’s portfolio adjusted for inflation would have been worth over S$2.7 million whereas Person A’s portfolio would be just under S$2.5 million. The mere 0.5 per cent difference in annual fees would add up to well over S$200,000.

Lastly, cryptocurrency like bitcoin and ethereum have been all the rage these days. Should I invest in them?

In the world of finance, there are many complex products, such as leveraged ETFs, options, futures, derivatives, cryptocurrency. Many of these also tend to be speculative assets that people buy hoping that others will eventually buy it off them at a higher price (as compared to investing in a company that does R&D to develop something new).

If you can afford it, there’s really no right or wrong when it comes to speculative assets.

However, as a general rule of thumb, I steer clear of any products I don’t understand.

In some ways, they are like mushrooms you find in the wild. To a skilled mushroom expert, it would not be difficult to figure out which are edible or poisonous. In the hands of a professional, they can still be used to make delicious food. But it probably isn’t wise for the average person to pluck wild mushrooms and bring them home for dinner.

There are many complex mushrooms and I shouldn’t try to make a mushroom dinner if I’m not a mushroom expert. Point taken.

So if I do all of this, I can most probably beat inflation and have a little extra money on my hands?

Yes! That said, wealth is often not an end in and of itself.

To me, I think of it more as a means to support the life that we want for ourselves and our families. Like having the option to take a little more time off work for our family when we need to, or accept a slightly lower-paying job that we enjoy more.

Why this is important to you will depend on what you are hoping to achieve with the extra money.

The information herein is given on a general basis without obligation and is strictly for informational purposes only. It is not intended as an offer, recommendation, solicitation, or advice to purchase or sell any investment product, securities or instruments. Nothing herein shall be construed as accounting, legal, regulatory, tax, financial or other advice. You should consult your own professional advisors about issues mentioned herein that may be of interest to you as the information contained herein does not have regard to any specific investment objectives, financial situation and/or particular needs of any specific person. The information contained in this publication, including any data, projections and underlying assumptions, are based on certain assumptions, management forecasts and analysis of known information and reflects prevailing conditions as of the date of the article, all of which are subject to change at any time without notice. The views expressed in the articles linked to this publication are solely those of the authors’, reflect the authors’ judgment as at the date of the articles and are subject to change at any time without notice.

Top photo by Javier Esteban, Executium on Unsplash

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