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How To Invest Over The Long-Term

Here at The Motley Fool Singapore, we received this question from one of our readers, that we thought would be relevant to the majority of retail investors. 

The question, coming from a 25 year-old first-time investor, was (question’s lightly edited to make for easier reading):

If we have S$200 to invest monthly, what are the shares that would be attractive to buy in terms of dividends and capital gains, say over a period of 20 years in this period of time?

Why Long-Term Investing Rocks

Before I delve into the question, I’ll want to pop some champagne in celebration, because the reader’s intention to invest over a 20 year-period in a company is the right path to Foolishness!

At the Motley Fool Singapore, we are staunch proponents of a long term buy-and-hold philosophy where investors buy shares in great companies and hold them for years. We do so because we believe it gives investors the best odds of success at investing.

Just take a look at Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI) . Hold it for 10 years as opposed to a single year, and the odds of losing money historically have been shown to be  dramatically reduced . Double that holding period to 20 years and the odds of us seeing red go down yet further.

Furthermore, the STI has grown by more than 5% per year –excluding dividends – to its current level of around 3,300 points since the start of 1988, when it was at 834 points. Tacking on dividends would  reasonably give us average returns of 7%-8% on an annualised basis .

Those were the returns an investor could have gotten had he held on to the index through hell and high water as our country went through some gut-wrenching times such as the Asian Financial Crisis of 1997; the Dot-com bust in the early 2000s; the SARs outbreak in 2003; and the still-fresh-in-our-psyche Great Financial Crisis of 2007-2009.

As it is with most economic disasters, ‘this too, shall pass’ and those who have the mental fortitude to hold on or even buy at the bottom of a crisis are likely to be ones who will be richly rewarded.

Of course, some would say it would be great if we actually have the ability to predict when disasters will strike, but that’s perhaps asking a little too much of us,  being the blind oracles that we are.

With that, let’s turn to the question at hand (to save you from my further ramblings!).

Working With Small Investments

I’ll address the issue of how investors can work with the seemingly small S$200 monthly investment first. With S$200 per month, it does mean that an investor who wants to invest in a blue chip like the bank DBS Group Holdings  (SGX: D05) , at around S$19.00 per share, would be unable to do so currently.

That’s because of the rule currently in place of having a board lot size of a 1,000 units. So, an investment in DBS would set an investor back by at least S$19,000.

There are some roundabouts to the problem, such as through the Blue Chip Investment Plan   (BCIP)  offered by Oversea-Chinese Banking Corporation  (SGX: O39)   that allows investors to invest in 20 different blue chips with amounts starting from S$100 per month.

While the BCIP is a welcome addition for individual investors who can only afford to invest in small amounts – such as S$200 per month – suffice it to say that there are quite a number of shares out there that require a much larger minimum sum for investment than S$200. For such shares, investors would have to save up enough before being able to plonk some cash into the higher-priced shares that they desire.

But that’s changing soon. Singapore Exchange Limited (SGX: S68), operator of Singapore’s Mainboard and Catalist stock exchanges, would be reducing the standard board lot size from 1,000 to 100 from 19 January 2015 onwards.

Singapore Exchange might even be reducing the board lot size to 1 unit in the longer-term, based on the comments it made back in August 2013 when a possible reduction to the board lot size was first revealed.

When the change to the board lot size happens, shares with high share prices would be open to even more investors.

Great Stocks To Own for 20 Years

The next part of the question deals with what shares are actually good investments to have for 20 years. At the Motley Fool, our corporate slogan is to Educate, Amuse, and Enrich. As a Fool, I believe strongly in investor-education and in that spirit, I think it’s way better to teach a man how to fish, rather than to give a man a fish.

So, instead of throwing out names, let’s see what we can learn from other great investors who have been there and done that.

I’ve previously shared about a  certain similarity   that can be found in the long-term holdings of professional investors like Warren Buffett and  Shelby Davis , who are both well-known for having investing time-horizons measured in decades.

Turns out, some of Buffett and Davis’ famous long-term holdings are companies that make products that have very little risk of becoming obsolete. While it’s certainly not the only way investors can look for long-term investments, finding companies with products that are not susceptible to swift and drastic changes in consumption patterns is a good place to start.

Buffett sums up this approach superbly with a clever quip: “Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it is going to be hurt by the internet. That’s the kind of business I like.”

Foolish Bottom Line

A S$200 per month investment might seem insignificant but if it is allowed to compound at around 20% per year for 20 years – as Sembcorp Marine  (SGX: S51)   and Singapore Exchange  have done over the past 10 years ended July 2013   – an investor would eventually end up with more than S$500,000. That’s a 1020% gain from the total invested amount of S$48,000!

Of course, that can only happen if the right shares are picked, which can often deliver tremendous rewards.

If that can’t be done, then even a pedestrian 5% annual growth (like what the STI has delivered over the past 25 years) for a S$200 per month investment can leave an investor with S$81,500 after 20 years. That’s not too shabby, isn’t it?

When all’s said and done, perhaps the key, is not so much about finding the right shares to invest over the long term, but rather, having the commitment to invest regularly, for the long-term.

For the Foolish reader who sent in the question, I thank you for it. It was great. For more answers to such questions, click here now to sign up for a FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David KuoTake Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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This article was first published on fool.sg in September 2013. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.