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Even If You Don’t Want to Invest, It’s Important To Know How To Invest

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I don’t think I’m too far off the mark to say that many working professionals in Singapore simply lack the time to manage their finances and investments properly. Long hours in the office and work-life commitments can take up a lot of time and energy, leaving one too drained to think about anything more besides hitting the sack.

That’s why many choose to leave their investing with professionals. Problem is, it’s hard to tell how good these people are without knowing what investing is all about in the first place.

I love investing, and would very likely choose to manage my own money (that’s why I’m here at The Motley Fool Singapore!) even when I’m retired. But at the same time, I’m confident that I can pick capable people to invest for me if I would choose to do so and that’s because I already have a pretty decent idea of what actually works in the capital markets.

And that, I think, is the point that many miss.

Sure, asset managers and sales people are contractually-obliged to look after your interests. But as the saying goes, “don’t ask your barber if you need a haircut” – it’s only human for them to look after their own interests as well.

As such it’ll be far better for you to understand what is going on and use that as a backdrop to evaluate your options.

As I learnt how to invest, I became aware of how to increase my odds of success at picking suitable avenues, funds, or even candidates to help me manage my money. Here are just some of the lessons I’ve picked up over the years.

1) It’s tough for professional fund managers to beat the market

Fund managers are supposed to be capable of using their wit and wisdom to outsmart the market and bring investors riches along the way. Problem is, the odds of picking a market-beating manager are really low.

One of the reasons why fund managers fare so badly is because of career risk. The stock market has a knack of making anyone look dumb over the short-term but yet become right over the long-term. The issue here is that fund managers are often judged based on short-term returns, when investors should really be looking at these managers’ long-term calls.

Because of that, the professionals often choose to stick with the crowd, preferring to flourish or flounder along with everyone else in the short-term for fear of ‘sticking out like a sore thumb’ and thus subject themselves to mediocre-performance over the long-term.

I might be wrong, but I guess that’s something that’s really counter-intuitive for most people.

After all, you’ll expect a professional basketball player to beat an average person in a 5 min basketball game, or for Tiger Woods to out-golf me with his eyes closed. But in the realm of investing, the professionals are often humbled by the averages.

2) Expenses and fees can kill an investor’s returns

In the first point, I talked about career risk being one of the reasons why fund managers tend to underperform the market averages. Another reason for the phenomenon is the fees and expenses associated with professionally managed funds.

A Morningstar report compiled a couple of months’ back showed that the average stock-based unit-trust in Singapore has an annual expense ratio (the cost that the investor pays to the fund managers) of 1.94%. That seems small doesn’t it?

But that can actually be an egregious misjudgement on the part of investors who have not taken the time to think it through.

In Singapore, there are currently two exchange traded funds (ETFs) that track the Straits Times Index (SGX: ^STI). The two ETFs, namely the SPDR Straits Times Index ETF (SGX: ES3) and the Nikko AM Singapore STI ETF (SGX: G3B), have expense ratios of 0.3% and 0.28% respectively.

Here’s a chart showing the difference in returns that an investor could have obtained for two funds that are both growing at 8% a year, but with different expense ratios of 1.94% and 0.3%.

After 25 years, a $10,000 investment in the fund charging 1.94% in expenses would become $32,362 while the same investment in another fund charging 0.3% in expenses would have become $53,543 – the difference in returns is not trivial.

And, we have to remember, a $10,000 investment growing at 8% a year would actually be worth $68,485 after 25 years. An ostensibly tiny 1.94% in expenses would actually eat up half of an investor’s returns.

Expenses can kill returns.

3) The stock market is volatile – but that shouldn’t scare you

Make no mistake about it. The market is volatile. The daily, monthly, and even yearly swings can be huge and when it’s headed south, the effects are painful.

But, for those without a keen sense of market history, when the market starts dipping, it is easy to panic and not realise just how common it is for the market to decline by 20, 30, 40, or even 50 percent in a year.

volatility

Source: Yahoo Finance, Author’s calculations

I’ve shared the chart above previously showing how volatile the Straits Times Index can be, stretching from the start of 1988 to July 2013. And, here’s what I wrote about it:

There were 25 full-years since the start of 1988, and there has been 11 years where the index has experienced a peak-to-trough drop of more than 15%. There were even two years (2008 and 2009) where the index dropped by more than half from its highest point in that year.

That’s rough isn’t it?

Thing is, the steep tumbles and tough times have not stopped the STI from rising by 285% since the start of 1988 to 21 July 2013. Nor has it stopped companies such as Jardine Strategic Holdings (SGX: J37), Dairy Farm Holdings (SGX: D01), and Super Group (SGX:S10) from delivering returns in excess of 1,000% since the start of 2003.”

Without understanding how the market works, any temporary collapse in stock prices might drive someone away from stocks even though the long-term history of a general upward trend in stock market prices would likely to be still intact.

Foolish Bottom Line

There’s nothing wrong with wanting to find others to help us invest our assets properly. But in trying to find such people, it’s perhaps worthwhile for us to learn more about how the market functions so that we are able to make better, and more informed decisions.

And, what are the takeaways from the three points I mentioned above? Well, if funds are the preferred choice for an investor, then in my opinion he should be investing for the long-term (without selling out every-time the market pulls back) in passively-managed index trackers with low expenses.

You might not hear such words from the financial industry’s sales people, but then again, like I mentioned earlier, “don’t ask your barber if you need a haircut” – your barber would say ‘yes!’ with glee.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group.