I have to admit, I was first attracted to investing because it felt like a game to me. When we invest, we have to dig around to find treasures. We can also compare our performances to others and the market to see how we are doing. It looked like an interesting game and I wanted to be good at it. Then, 2009 came and the financial crisis revealed to me that investing was not just a harmless game, but rather one that can ruin me if I am not careful. I saw many people, who were not aware of what…
I have to admit, I was first attracted to investing because it felt like a game to me. When we invest, we have to dig around to find treasures. We can also compare our performances to others and the market to see how we are doing.
It looked like an interesting game and I wanted to be good at it. Then, 2009 came and the financial crisis revealed to me that investing was not just a harmless game, but rather one that can ruin me if I am not careful. I saw many people, who were not aware of what they were doing, end up badly-burnt during the crisis. The worst lot even faced bankruptcy.
So, investing is a dangerous game if investors aren’t educated about what the market is really about. However, it can be a fulfilling game for those who understand the risks. So, let’s explore one important thing you can do to protect yourself in the market, so that you too can end up a victor.
The only reason why investors can be faced with bankruptcy during the Global Financial Crisis was because they had used borrowed money to invest. As billionaire investor Warren Buffett once said:
“And as well learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”
Leverage is an ally you have to watch really closely in the investing game. It will be very helpful when the times are good, but it will stab you in the back when the bad times come rolling. So, it might be better to only invest with the money you can afford to lose.
If you had invested only with your own savings, you would be able to withstand a downturn like the one seen in 2008/2009. By holding on, you can then enjoy the strong rebound seen in Singapore’s market; since it reached its bottom in March 2009, the SPDR STI ETF (SGX: ES3), a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has gained slightly more than 120% in price.
If an investor had been highly leveraged during the crisis, it may well have produced a “zero” for his or her portfolio, thus causing one to miss out on the subsequent recovery. That’s something we have to keep in mind as investors.
Knowing about the dangers of leverage is important. But there are also other important things to know about the stock market. If you’d like to find out more, we at The Motley Fool Singapore have prepared a report titled What Every New Singapore Investor Needs To Know . It is a quick five to 10 minutes read on what’s really important about the share market and is a great guide for both new and experienced investors alike regarding the basics of the market.
Also, to learn more about investing and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead. Also, like us on Facebook to follow our latest hot articles.
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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 writer Stanley Lim doesn’t own shares in any companies mentioned.