Investing Make Simple (Level 1)

1. The simplest investing strategy

• The simplest investing strategy : Passive Index investing

• Passive investing = invest in S&P500 or World ETF (just pick one), and DCA every month, regardless of the economy

2. Rules of the Game

Rule 1: Nobody can time the Market

• There are many maco factors that causes the market to crash & boom. Thus is very difficult to pin point the specific reasons. Do not pay too much attention to the News.
• There is no consistent winning strategy, to predict winner and loser over long term.

https://www.youtube.com/watch?v=TrkOWfQUSwQ

• But if you stay long enough, you win more than you lose.
• One thing you should never do is paying someone for an ultimate strategy or a fanciful plan that is difficult to understand, since we know all outcome are by chances.

Rule 2 : Market will always crash.

• Nobody know when it will happen, but it will eventually happen.
• Assets that once grown in value now declined.
• People are panic and sell to salvage whatever they have left.
• But the fact is, you never really lose money until you sell.
• When there is a crash, everything is in discount.
• Riches are made during the crash. Buy & wait.

Rule 3: Market will eventually Rebound.

• Market will eventually rebound.
• If you had just held on during the dot com bubble. You will had 4x your money.
• The market is driven by the earnings. Long term, earnings are driven by inflation and population growth.
• Market always go up over long term.

3. Risks & Rewards

• Investment is all about risks and rewards.

• What exactly is the risks? What are the rewards?

The Real Risk

• There are 2 phases in our life. Accumulation phase and decumulation phase.
• We actually only need to sell our investment during decumulation phase when we stopped working and need our investment to fund our expenses.
• The real risk is actually insufficient cash during the retirement period.

Causes of the Insufficient Cash during Retirement

1) LOSS OF CAPITAL

• In general, there people losses money because:

1. Investing in speculative assets. Taking too much risks.
2. Trading in and out of the market
3. Buy high, sell low. Panic sell
4. Using margin to invest

5. Invest the money they need in a short term

• Risk Mitigation- Have a strong mind and holding power

1. Always have a long term perspective when come to investing. (Psychological)
2. Always invest money you do not need. (Have holding power)

3. Do not invest with margin. (Have holding power)

2) TOO CONSERVATIVE DURING ACCMULATION

• By holding cash, it loses it value through inflation.
• The only way to combat inflation is to acquire assets.
• The fear of losing money actually is the cause of you losing money.
• Compare 100% Equity to 100% Bond portfolio. We can observe the cost of having a very stable portfolio.
• You do not need any bond during the accumulation phase for your investment account. Maybe only in your decumulation phase you need some bond to have some stability, MAYBE.
• However, is totally fine to put portion of your emergency fund in capital guaranteed Singapore Saving Bond or other government backed securities to earn some extra interest, that is for your saving account.

REWARDS

• Any real investment will have an Expected Returns, else is a speculation.
• Expected returns is not what i think or what you think, it is based on long historical data, is what the market say.
• Expected returns separate an investor from a gambler.
• When picking individual stock, an expected returns is derived from the DCF model with conservative assumptions and there will be error, sometime.

• If you do not like do deal with numbers. The market have an average expected returns of 8% to 10% p.a.

Why is Expected returns so important?

• With an known expected returns, your financial planning will have a more probable Expected Outcome.
• In addition, with an expected returns, you will have a much clearer idea how to achieve your investment goal.
• With Expected Returns, timeline and a retire amount in mind, you just have to define how much money you need to put into the investment.
• You will also know if you are setting an unrealistic goal or actually a achievable one.
• Instead of going into risky assets that have unexpected returns that will lead to unexpected outcome, you can just simply invest more into assets with an expected returns that will lead to an expected outcome.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

4. Conclusions

• Dollar cost average into board based, low cost, index fund
• Market go through cycles. Stay clam.
• Never loss money by investing money you dont need and never use margin
• Dont be too conservative during accumulation phase.
• Real investing have an expected returns.

• Expected Returns will lead to expected outcome, which will make financial planning easier.