Hello! Here are some basic tips that I have gathered.
Constant Monitoring
One of the advantages of passive investing is that you don’t need to actively look at your portfolio, but you can leave the dividends and fixed income that comes from stocks, REITs, ETFs or bonds. But you still need to monitor the profile of your stocks every once in a while. I personally know people, who invested in Hyflux, but because they did not monitor Hyflux’s financials, they lost quite a large sum of money. Other than bonds, stocks, REITs and ETFs don’t necessarily guarantee you a fix sum of dividends. Therefore this amount may fluctuate over time, so you can’t just forget about your investments.
Mature Companies and Industries with Track Records
Since you are looking for companies that pay you a fixed income, you would want to select companies that are already profitable and have enough cashflows to be able to pay you your dividends. A company may not want to pay out dividends so that they can have additional cashflow to grow their business operations, or even survive. You also want to look at industries that are not going through disruptive changes. For example, StarHub and the media industry in Singapore is facing a lot of disruption from online streaming services and YouTube. A more mature company and industry can help your future cashflows to be more predictable. Finally, you might also want to choose companies with defensible business models. Since you are going to be invested for the long term, you should look at businesses that can seemingly defend themselves against newer entrants into the market.
Choosing a Business You Understand
As a passive investor, you should ideally choose stocks where you understand how the business works. You don’t necessarily have to understand their model completely, but you should have an idea about what the revenue and cost drivers are, and what can affect the profitability of the business. Industries that are easier to understand are usually Business to Consumer (B2C) models such as F&B or retail. Understanding the business or the industry means that you have a better chance on whether to stay invested or cash out. A negative example that I can use is again the Hyflux one. I believe that many people may not have really understood how their model actually works, since it can be quite complex and does not operate like most other businesses we see out there. This could be one reason why retail investors may not have been aware.
Time Value of Money
Since you are forecasting your returns prospectively, we probably need to remind ourselves that a dollar today is worth more than a dollar tomorrow. This is because I can use the money I have today to earn returns, or to spend it. Another reason is that inflation is present, which erodes the purchasing power of the money you have in the future. This is something that passive investors should also take note, especially if you are comparing companies with different dividend payouts but pay the dividends in different time periods.
Hello! Here are some basic tips that I have gathered.
Constant Monitoring
One of the advantages of passive investing is that you don’t need to actively look at your portfolio, but you can leave the dividends and fixed income that comes from stocks, REITs, ETFs or bonds. But you still need to monitor the profile of your stocks every once in a while. I personally know people, who invested in Hyflux, but because they did not monitor Hyflux’s financials, they lost quite a large sum of money. Other than bonds, stocks, REITs and ETFs don’t necessarily guarantee you a fix sum of dividends. Therefore this amount may fluctuate over time, so you can’t just forget about your investments.
Mature Companies and Industries with Track Records
Since you are looking for companies that pay you a fixed income, you would want to select companies that are already profitable and have enough cashflows to be able to pay you your dividends. A company may not want to pay out dividends so that they can have additional cashflow to grow their business operations, or even survive. You also want to look at industries that are not going through disruptive changes. For example, StarHub and the media industry in Singapore is facing a lot of disruption from online streaming services and YouTube. A more mature company and industry can help your future cashflows to be more predictable. Finally, you might also want to choose companies with defensible business models. Since you are going to be invested for the long term, you should look at businesses that can seemingly defend themselves against newer entrants into the market.
Choosing a Business You Understand
As a passive investor, you should ideally choose stocks where you understand how the business works. You don’t necessarily have to understand their model completely, but you should have an idea about what the revenue and cost drivers are, and what can affect the profitability of the business. Industries that are easier to understand are usually Business to Consumer (B2C) models such as F&B or retail. Understanding the business or the industry means that you have a better chance on whether to stay invested or cash out. A negative example that I can use is again the Hyflux one. I believe that many people may not have really understood how their model actually works, since it can be quite complex and does not operate like most other businesses we see out there. This could be one reason why retail investors may not have been aware.
Time Value of Money
Since you are forecasting your returns prospectively, we probably need to remind ourselves that a dollar today is worth more than a dollar tomorrow. This is because I can use the money I have today to earn returns, or to spend it. Another reason is that inflation is present, which erodes the purchasing power of the money you have in the future. This is something that passive investors should also take note, especially if you are comparing companies with different dividend payouts but pay the dividends in different time periods.