Why start investing?

My investing journey started only in June 2020. However, my intention to start investing dates all the way back to 2015 when I was in National Service. As such, why was there this huge lag and why now? 

In this post, I will attempt to address my inertia and how I got over this inertia to finally take the first step. 

Growing up, you probably would have heard of the great 'Stock market' whereby it is the greatest mechanism for one to get rich. I know I did. On the flip side, you probably would also have heard stories of many going bankrupt or lose a significant portion of their savings due to their greed and the complexity of the system.

This developed a mental model for me that the stock market allows one to earn money quickly, but is extremely risky as well. Being the risk adverse person that I am, I disliked the idea of 'gambling' in the stock market, but I do acknowledge its capabilities to make one wealthier. Personally, the idea of losing $5 hurts more than gaining $10, but the idea of earning $10 is very tempting nonetheless. As a result, I had the intention to invest, but was too afraid to expose my savings.

My excuses? 'I would not understand it anyway', 'Too risky', 'I'll probably lose more money than what I will gain', and so many more. These negative thoughts were very discouraging and served as a huge obstacle for me. So in the end, what tipped the balance? 

There are two main reasons: clearing of misconceptions and new found motivations

Clearing of Misconceptions 

My initial perception of the capital market remains true - it is high risk, but not necessarily high reward. However, a misconception I had here is that risks cannot be minimised. Throughout the 5 years 'investing-gap', I came to learn that risks can, in fact, be diversified or minimised. Even though rewards are not guaranteed, the risks we take on can be controlled to a certain extent by us, hence giving a better risk-return trade off. This shift in mindset started to break off the proverbial wall I built around investing. 

To illustrate, the capital market is like a dessert store. It is filled with a variety of desserts (ice-cream, cakes, etc) and different flavours (peanut, strawberry, vanilla, etc) for each dessert as well. A person allergic to peanuts would not risk an allergic reaction by buying the peanut-filled dessert but can certainly enjoy other treats as well. 

As such, risks are supposed to be rewarded hence the term 'high risks high rewards', but the risks we take on ultimately are controlled by us. For example, if we find equities too risky, then perhaps governments bonds can do the trick. Ultimately, it depends on our own investing strategy and what are our risk appetites. 

The second misconception I had was that I will definitely lose 100% of my invested capital in the capital market. This is only true to a certain extent. There are many sources that describes investing as 'buying the business'. However, what does this actually means? 

To help with visualisation, I imagine myself as 'giving' money to a business in exchange for their productivity and growth. In a sense, I am giving up 100% of my capital in order to buy a stake in their company. This stake, however, is not worthless. This means that the stake I bought could rise in value (the company's value increased) which I can then choose to sell to another person who wants it (thus realising a profit). As such, the only way I could lose 100% is that the company goes bankrupt which results in no one wanting a stake in this company. 

However, with that being said, it is not a given that a company will rise in its value. As such, before we invest, there is a need to do qualitative and quantitative analysis of the company to ensure that there is reasonable reasons to believe the company will be more valuable in the future. This would then minimise the chance of our investments from going to zero. 

New found Motivations 

In addition to the misconceptions cleared, there were 3 main reasons that spurred me to start my investing journey.

Firstly, I was inspired by the FIRE (Financially Independent, Retire Early) Movement. Essentially, the idea behind this is quite simple - have enough wealth to retire early. In order to retire early, there is the incentive to accumulate assets in the early stages of our lives (with time and compounding effect contributing significantly). What this means is using our income from our day jobs to fund our asset accumulation process so it can snowball and fund our later lives. An example would be continuously buying dividend stocks such that in the future, the monthly average dividends could cover one's daily expenses (Cash from dividends = expenses). In this way, lifestyles could be sustained indefinitely. It definitely paints a rosy picture. 

For myself, I want to be able to live on an average $500 monthly dividends. This would mean $6000 yearly dividends. Given an investment (A) that gives 4% yearly dividends (rough estimate), I would require at least $150,000 invested in it. The investment should also ideally not lose its value as well. This means the investment should be worth $150,000 or more. If A loses value to $140,000 then I would lose $10,000 (which may offset what I gained in dividends income). As such, though it is important to start early to accumulate the assets, there is equal importance in researching diligently to buy assets with good upside potential.

Secondly, the cliche reason would be the need to beat inflation. Singapore's average inflation rate over 20 years is at 1.57%. This means that things get more expensive by 1.57% yearly. If we leave it in a bank that gives 0.05%, our money's value will be eroded away quickly. As such, there is an importance to go into assets that gives >1.57% returns. This will then ensure that the value of money does not get slowly withered away by staying above the inflation level. 

Lastly, I felt the importance to have an additional stream of income. As with Covid19, I saw the concentration risk a day job posed in times of a recession. If I were too reliant on my day job in providing for my survival, I am essentially putting all my eggs in one basket. With recession, the basket would be eliminated entirely, leaving me with no backup. 

I experienced first-hand how unreliable a day job is. Yes, I could up-skill and diversify my skillsets but if there are no openings for a job, no matter how skilled I am, it will be extremely difficult for companies to fit in one additional headcount. As such, even though investments may not guarantee returns (or could even lose money in times of recession), it is good to have another potential lifeline in my perspective. Why give up on a lifeline just because of the uncertainty of returns? 

With all these said, there is a need to reiterate that investments do not always guarantee returns. Investments do not guarantee a highway to success/financial freedom, all it does is to provide a potential avenue to achieve the mentioned. I could be investing all I want but in the end it might even lead to more losses than gains. Who knows, only time will tell.

Closing note

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*Disclaimer - I am not a professional investor and am a complete beginner in the investing arena. As such, my investment thoughts should be taken with a pinch of salt and challenged if need be. Also, it should not serve as investment advice, When in doubt, please do your individual research and check with your financial advisor.