Can You Afford To Retire?

Have you ever accidentally dropped a slice of buttered toast on the floor? It can happen.

Did your toast land buttered-side up or buttered-side down? Chances are it ended buttered-side down.

Some people will say that is just bad luck. But luck, it seems, has very little to do with it. The answer, instead, lies in Newton’s Law rather than Murphy’s Law.

Higher table

The probability of the toast landing the right way up would improve considerably, if it should fall from a greater height.

Unfortunately, our dining tables, which are normally just a few feet above the floor, means that toast will inevitably land buttered-side down.

So if you want to avoid ruining your breakfast then sit at a higher table!

The same goes for looking after our retirement nest-egg.

Our aim should be to build a pot of money that is substantial enough for the day we decide to stop work. In other words, we need to make sure that we are better prepared by being higher up the cash-table.

When we retire, we need to make sure that we have more money at the end of each month, rather to have more month at the end of our money.

Can do better

According to a recent report from a government-appointed panel we can do more to help ourselves.

For instance, there is S$105 billion of cash in the Central Provident Fund (CPF) that could be invested… but hasn’t. Only S$25 billion of the available cash has been deployed.

It gets worse.

Only one in six people managed to generate an annual return of more 2.5%, which is the risk-free interest that we are paid on our cash. Around half generated a return of 2.5% or less.

Nearly one in two who invested through their CPF lost money last year

So where did they go wrong?

Firstly, we should not read too much into one year’s returns. Investment returns should be measured over decades rather than over months and quarters.

Remember also that stocks can move in the opposite direction of the fundamentals of the company over the short term.

The next Warren Buffett

So, a short period of underperformance does not necessarily mean that you are a bad investor. Similarly, a brief period of outperformance doesn’t mean that you are the next Warren Buffett, either.

It is time in the market rather than timing the market that is important.

So, unless you intend to hold a stock for the long term, you should not even think about buying shares.

That, however, has been the problem with many investors. They are too impatient. They expect instant gratification. They want immediate success.

Consequently, some buy and sell investments too frequently, which means that they pay far too much in fees and charges. Transaction costs will inevitably eat into our returns.

Some are also too quick to flip investments. They buy when other are buying, which is when prices are likely to be too high. They also sell when prices are low. Buying high and selling low is a recipe for disaster.

Who’s at fault?

In the end, it is neither the stock market nor companies that determine our fate. It is not the fault of the CPF Investment Scheme, either. It is us.

A share is not a lottery ticket. It is part ownership of a company. So, don’t go in search of long shots. They rarely pay off.

Instead build a portfolio of great companies. Often there is no correlation between the success of the company’s operation and the success of its stock price in the short term. But over the long term, there is.

So hang onto those wonderful companies for the long term.

Within the Straits Times Index (SGX: ^STI), companies that include SGX (SGX: S68), StarHub (SGX: CC3) and Jardine Matheson (SGX: J36) have delivered compound annual returns in excess of 10% over the last decade. That’s not a bad return by any measure.

Peter Lynch once said: “The stock market demands conviction as surely as it victimises the unconvinced.

He is right. Behind every share is a company. You have to know what the company does before you invest in it.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take 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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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.