1 Important Thing You Must Do When Investing: Setting the Right Expectations

Before we plonk a single cent into the shares of a company, there’s something very important we must do: Ask ourselves what we expect to get out from the investment.

It’s an important question because having unrealistic expectations might cause us to take unnecessary risks in the stock market.

Understand that the tortoise wins the hare in investing

The SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index (SGX: ^STI), has delivered a compounded annual return of 8.6% since its inception in April 2002.

This is the return that the “stock market” will likely generate over the long-term and investors have to understand that it’d take roughly 8 years and 5 months for our investments to double if we’re compounding at a rate of 8.6% per year.

It’s a great example of what investing really is: A long and slow process. Investing is a life-long pursuit that requires discipline, faith, and patience (we at the Motley Fool Singapore hope to make it fun as well!).

If you expect to earn say S$1000 every month consistently with a relatively small invested-sum of say S$10,000, you might be very disappointed with what the stock market might offer. This might then push you to pursue risky stocks or other investments that ultimately may harm your long-term wealth.

But, for those who are able to stay the course, one may come to appreciate the true beauty of investing that not many will have the privilege to see: The power of compounding.

An investor investing $10,000 into the SPDR STI ETF today, and assuming that the ETF can generate a 8.6% annual return like it has done over the past 13 years, can see his savings balloon into $120,000 in 30 years. But, the key to making multiples of your savings is that it takes time.

Those $10,000 in savings would never be able to become $120,000 if the investor did not have the patience to stay invested for the long-term.

Foolish Summary

Compounding is the beauty and wonder of investing. Most of us are too focused on what is just in front that we fail to see what might be possible in the decades ahead.

I don’t think it’s a stretch to say that many of us are investing for a better future 20 or 30 years down the road and not for immediate pocket money. So, let’s keep our focus on what’s important – the long-term.

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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.