Happy New Year to all of you. I hope 2013 has been a good year for you and that 2014 will be an even better one. I have a feeling it might be. There is no denying that the stock market has been a confusing place over the last 12 months. For instance, most experts had predicted earlier in 2013 that the US Federal Reserve would have started scaling back its money-printing activities by September. But it didn’t. Many of the same experts then predicted that the Federal Reserve would not start its tapering activities until 2014. But it…
There is no denying that the stock market has been a confusing place over the last 12 months. For instance, most experts had predicted earlier in 2013 that the US Federal Reserve would have started scaling back its money-printing activities by September. But it didn’t.
Many of the same experts then predicted that the Federal Reserve would not start its tapering activities until 2014. But it did.
The market never fails to surprise us. But the element of surprise merely adds to, rather than detract from, the attraction of investing in shares.
It is only when there is a whiff of uncertainty; a hint of alarm and an element of not knowing what lurks around the corner that makes it possible for us to profit from buying stocks at attractive prices.
If we knew everything there is to know with absolute precision, then it would be nigh on impossible to gain from investing in shares. That is because we would be able to calculate with absolute certainty the present value of everything since we would have complete knowledge of what is going to happen in the future.
But risk and uncertainty provides us with the opportunity to profit from stock market investing. And the first important way to start becoming richer in 2014 is to begin investing regularly immediately.
How to make a million
Historically, the Singapore market has delivered a return of around 8% a year. About 5% of this has come from capital gains and roughly 3% has been generated through dividends.
Put another way, if you had regularly invested $1,000 a month into a Singapore stock market index tracker over the last 20 years, your money would have grown to around $590,000. It means that your total investment of $240,000 would have more than doubled in two decades.
What is even more remarkable is that if you had invested the money for 30 years, your total investment of $360,000 would then have quadrupled to almost $1.5 million. In other words, the longer you stay invested, the more your money is likely to grow. That is the power of compounding.
The second way to start becoming richer in 2014 is to reinvest your dividends. It is a simple concept but, nevertheless, one that many investors tend to overlook and dismiss.
Consider two investors who invest identical monthly amounts – $1,000 – into an index tracker such as the SPDR STI ETF (SGX: ES3) over 20 year but with one crucial difference. The difference being that one reinvests the dividends while the other doesn’t.
If the index tracker had mimicked the performance of the Straits Times Index (SGX: ^STI), the difference between the two pots would have been $179,000. In other words, the simple but, nonetheless, powerful act of reinvesting the dividends would have generated a considerably bigger return.
The third way to start becoming richer in 2014 is to stay invested – come what may. One of the biggest mistakes that many private investors make is to believe that they can somehow second-guess the every twist and turn of the market.
The harsh reality is we can’t.
None of us can accurately predict what the market is likely to do next. So, constantly dipping in and out of the market on a whim might not only be pointless but costly too. Rapidly trading shares inevitably adds to the cost of trading, which in turn eats into our returns. Constantly trading shares, as Warren Buffett pointed out, is a great way to make your broker rich at your expense.
Here at the Motley Fool we are great proponents of the benefits of long-term investing. We don’t believe in get-rich-quick schemes. Instead we strongly advocate the benefits of constantly adding money to the market over the long haul.
As Warren Buffett once said: “Investing is so favourable to the investor that it is a terrible mistake to dance in and out of it based on the turn of a tarot card.”
So put away your tarot cards in 2014 and just start adding, adding, adding money to the market whenever you can.
From all of us here at Motley Fool Singapore, we wish you a very happy New Year.