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One Easy Rule of Thumb for New Investors

Yesterday, I read with much interest on my fellow Fool’s take on a question from one of our readers. That question was:

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?

As my Foolish colleague Ser Jing shared about what are the options available, I would like to suggest a simple rule of thumb on how S$200 per month might be put to good use in the share market.

Pace yourself

In my opinion, one easy rule of thumb to consider might be: to invest at a rate of half the savings, and to keep the other half. In the case of $200 savings per month, the individual investor may consider investing at $100 per month, and keeping the other half.

The objective of the rule of thumb is two-fold.

Firstly, the share market can often exhibit wide ranging volatility for different years, so it may to be appear scary at times for a new investor to hold shares. In this case, a smaller allocation may help new investors to ease into the market at a pace which is less scary.

Bear in mind that the overarching goal here should be the period of time mentioned by our attentive reader, which is to buy to hold for 20 years. It’s a very Foolish goal, and smaller allocations — built up over time — may just assist the individual investor to get there.

Secondly, the $100 kept per month can slowly add up to build a cash position for the new investor while he or she invests the other half. This can add up to a $1,200 cash position after the first year.

But why keep a “cash cushion”? It is possible that share price movements may have an effect on how we behave. So, having a “cash cushion” on your side may have a calming effect during times of market turbulence. With a cash cushion, new investors might also have the option to pick up better share prices when a correction or recession inevitably comes.

If the amount of $100 per month sounds like a small amount, my colleague has also pointed out a key example, which may put this to rest:

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 Limited (SGX:S68) 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!

The Final Foolish word

We do not know when the next downturn might be. The biggest tragedy may be for new investors to be discouraged by a random downturn, and be turned off from share investing for the rest of their lives.

As it is, our astute reader might have already found the right time horizon, and the rule of thumb might prove helpful for the 20-year journey ahead. With that, I join my colleague Ser Jing in celebrating the Foolish choice of looking to buy to hold for 20 years. To continue your (FREE) investing journey with us, 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 shows how you can GROW your wealth in the years ahead.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.