The First Step

If you have been following this blog and have finally let the dust settled, it is now time to take action. Action speaks volume, action turns imagination into reality, action kicks start the entire thought processes. Action speaks louder than words, you get the idea... So what is your very first step? When I first introduced investing and trading to my dad and mum, both have high expectations. When I asked them what would be their ideal annual returns and their reply was 40% and 50% respectively. Let's take 40% return as an example, if you start an investment with $1000 at the start of the year, you are expecting to achieve a return of $400 at the end of the year. Sounds good? Mind you, these are sound beings who have worked their entire life with savings and CPF contributions.

EXPECTED RETURNS

If I benchmark their expected returns against the world's most renowned investor, Warren Buffet's whose Berkshire Hathaway multinational conglomerate averages about 11% in a 10 years return, they hoped to achieve more than 29%! And if you save your money in the bank in the form of fixed deposit, the bank will pay you an interest of 0.5% with a minimum sum deposit of $20K over a 1 year period. Even with CPF Special Account, SA, you will get a 4% non-withdrawal interest until you reach the age of 60 years old. Therefore, a 40% or 50% return is a perfect dream for all investors. Which brings me back to one point: What is your ideal expected return? As simple as this question may sound, setting your expectations right is extremely important. If you are a beginner to investing, it is critical to keep your feet on the ground. While the right investments can see good returns over a decent time horizon, one should never think of it as a get rich quick scheme. Time is of essence in investment, the earlier you start, the earlier it gets. So what should be an ideal return for a beginner investor? Once again, this question can be subjective, everyone has a different risk appetite. Whatever that can is considered as a risky investment can be safe to some. To each his own. When I first started investing, I was looking into my own finances and mainly on the annual returns. Surely, it was pathetic... Like most who knows nuts about investing, I kept my money in the bank picking up pathetic interest and never really put my money to work. Since young, I was programmed to the idea of keeping money in the bank as the safest way to my money safe. Literally... but by not putting the savings to work, it was unforgivable.

STANDARD & POOR'S 500 INDEX

In the investment world, there is a famous phrase "beat the market". When one refers to beating the market, it means to achieve better returns than the industry standards. Specifically, it means is to post a higher return than the market and in this case, the market can be the S&P 500. The S&P 500 otherwise known as the Standard and Poor's 500 Index is an index which features the 500 largest public listed companies in USA. Companies based on their market capitalization offer shares available for the public to trade. The S&P 500 which is widely regarded as the "standards" to beat by most funds averages about 9% over the last 30 years. As such, if there is a magical number for expected returns, it would logical to follow the industry standards of achieving a 9% annual return. In fact, if you can achieve a consistent 9% annual return, you might be on your way in becoming a very successful investing rookie. That being said, many successful investors can achieve higher percentage return.

DISSECTING RETURNS

I hope that it is now clear to you that when you have decided to invest or trade, you are positioning yourself into a situation where you can profit or lose. Many beginners are attracted to limelight of  winning big money when they are first exposed to investing. These advertisements come in the form of social media feeds where companies offer FREE training in the form of webinar or your colleague telling you how much he has earned from his recent investments, they can come in many forms. I have attended many of these "gurus" webinars, each with their own unique selling point to eventually offer you a subscription course or some sort of training for you to learn about investing. Some might even tell you about their background from being a pauper into becoming a money magnet, others even go to the extend of showing you their investment portfolio or simply performing a live trade to show you how easy investing is (which is pretty rare). While most are quick to form skepticism over these "gurus", personally I think it is a good way to kickstart your investing journey. From these "intro" classes with you be able form your own judgement into your commitment to investing. Pick up the lingos and jargons used in the financial world by listening carefully and if you have attended many classes like I do, you will be able to find similarities in the content and work towards a common path. I will share about my initial thoughts when I first attended these "gurus" classes in my future post.

So now that we have understood that winning and losing can happen in investing. These are some questions that you might have to ask yourself. Do you invest because you want to achieve capital growth? Use investment as a form of income? or simply a way to preserve your wealth? While they might all meant the same thing, they are actually same same but very different. 

Capital growth means growing your current money pool. You want to invest so that you can grow $10 into $100 over a period of time. Income means being able to generate income in the form of dividends or returns regularly in the likes of a salary. Preserving wealth means to safe guard your money pool so that they do not erode due to inflation. Whichever choice you make has a different outcome to your ultimate end goal of being successful in investing. To take this one step further from making these choices, one has to ask yourself what is your risk tolerance? How old are you now? What is the kind of lifestyle that you hope to achieve? As you can see, the journey to invest is not as easy as saying: YES, I WANT TO DO THIS! It is more of: WHY DO I WANT TO INVEST?

About The Contributor

Ben is not financially trained. He is not a certified financial planner and he does not sell any insurance or investment plans. He is not financially motivated by any entities to produce this blog. He just want his friends to know more about money management and not have anyone fall between the social cracks. Nope, he is not a millionaire though he aims to be financially free before 50 years old.