Cheap is good and free is better! But what if you save on management fees at the expense of your investment returns? Do you have what it takes to be a DIY investor?
70% of Singaporeans aged 16 to 29 want to start investing, according to findings of a study done in 2019, with only 38% consider themselves knowledgeable. But having knowledge does not equate to having the ability to manage your own investment portfolio. A simple analogy would be: knowing how to cook doesn’t automatically make one a chef.
So for our final article of 2020, let’s take a look at the some of the important considerations before deciding whether to DIY in the complex world of investments.
Diversification
This is one of the most fundamental yet not well understood concepts in investment management. It involves the statistical concept of correlation, where we will need to choose stocks that are negatively correlated, by spreading out your capital into different asset classes (and not just different companies). The desired outcome is a reduction in risks and improved overall portfolio returns, or what is also known as smoothening of volatility in your portfolio returns.
It sounds simple enough in theory, but it is unsurprisingly difficult to apply in real life because it will involve:
Furthermore, such a large portfolio will require a sizeable capital outlay. Assume you own 1 lot per stock that you choose. Taking the average of the share prices of the top 30 companies listed on SGX, their shares will cost $8.57 x 100 shares x 30 stocks = $25,710 (as at 30 Nov 2020).
Uncovering an investment Gem, or an Unregulated scheme, or an investment Scam?
As if the volume of traditional stocks and shares aren’t already enough to overwhelm us, we also have to navigate our way through unregulated investment schemes and outright scams.
Scams
Even though Singapore came out tops in the 2015 financial literacy index in Asia-Pacific, many Singaporeans continued to fall prey to investment scams since then. In fact, $36.9 million was lost from investment scams in just January 2019 alone.
If you still have the stereotype that only the elderly or uneducated become victims, think again. Many scammers have improved their tactics by reaching out on social media, using celebrities or famous people, and dressing well in branded goods to create an association to success. As a result, an increasing number of millennials have become the latest victims of such scams.
Case in point: A 31 y/o Singaporean got caught in 2019, for promoting a non-existent investment scheme on social media, cheating $500,000 from 62 victims, including his own friends.
Some scammers have even gone to the extent of creating websites requiring authentication for “investors” to access their “investments”. Second case in point: In 2016, an offshore sports arbitrage betting company cheated more than $1 million from Singaporeans mostly in their 20s and early 30s, including a bank employee and a F&B businessman.
Unregulated Investment Schemes
There has been a rise in the number of fintech-based investment options, including trading of digital tokens (e.g. cryptocurrency) through online platforms. But, because they are neither accredited nor regulated by the Monetary Authority of Singapore (MAS), they pose a greater fraud risk to consumers, especially so when their credibility cannot be verified. As such, in the event you lose money from dealing with these unregulated products or entities, MAS will not be able to help in any way.
Third case in point: A lack of oversight in Initial Coin Offerings (ICOs) resulted in criminal activities such as this hack attack, where more than US$50 million worth of tokens stolen from investors.
Practicality of DIY
Just as how doing your own renovations in your home will take up a lot of time and effort, managing your own investment portfolio will also require many hours and even more brain juice. Because a significant amount of preparation work will need to be done before you can even decide what stocks to buy, and in what quantities.
The research required includes:
In conclusion
You may be able to afford the time needed in your 20’s, but I’ve had so many clients share with me that once they start a family, it is no longer practical for them to upkeep their own investment portfolio, as they simply cannot keep up with the dedication required anymore. They also feel that spending their limited free time with their children, is a much more valuable investment.
The concept of outsourcing takes place in our lives almost on a daily basis. Be it engaging a workshop to service our cars because we know almost nothing about car parts, or having dinner at a restaurant that has been prepared by a chef so that we don’t have to cook it ourselves, we tend to feel more assured when professionals take charge. And the managing of our investment portfolio shouldn’t be any different.
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